A shift towards positive correlation between stocks and bonds may already be underway and this phenomenon could persist for many years and be widespread across all global markets if history is a guide, according to Dr Noah Weisberger, a managing director in PGIM’s Institutional Advisory and Solutions (IAS) group.

This could lead to a “more volatile world” for those trying to maintain balanced portfolios, Weisberger said, and may force investors to either raise their risk budgets or lower their return expectations.

Speaking in a podcast discussion with Amanda White, director of institutional content at Conexus Financial, Weisberger noted the correlation between stock and bond returns has been negative for  the past two decades, allowing market participants for most of–or even all of–their careers to view bonds as a partial hedge for stocks .

But going back earlier to the post-war period, there were 35 years following the mid-60s to around 2000 when stock and bond correlation was positive. Preceding this was a long period of, again, negative correlation.

Investors are possibly conditioned to think of market conditions as higher frequency phenomena, but “this phenomenon – stock-bond correlation being negative or positive – can persist for a really, long time,” Weisberger said.

Predicting a turn in correlation is difficult because it involves a range of different factors and policy levers that can be hard to pinpoint, Weisberger said. Was positive correlation 1965 to 2000 period determined by the oil price shock? Or, was it overly accommodative monetary policy? Or, was it strong productivity growth and the tech bubble?

IAS looks at broad macroeconomic themes like fiscal sustainability, the degree of perceived monetary independence, the degree to which supply or demand is driving the economic cycle, and investor sentiment. These policy and economic conditions “connect very intuitively to…stock-bond correlation,” Weisberger said.

He believes macroeconomic conditions could be pointing to a period of positive correlation: increasing uncertainty about the sustainability of fiscal policy, concerns about the independence of monetary policy, greater volatility of interest rates and the negative co-movement between economic growth and policy rates.

“Those are the things that we think have, in the past, driven stock bond correlation, at least in the US, and prospectively going forward is what could push us into a positive regime from the negative one that we have become accustomed to,” Weisberger said.

White asked if the same factors will apply to global markets or just to the US. Looking at some other developed markets like the UK, Japan and Germany, Weisberger said he was struck by the degree to which developed market stock and bond correlations move together.

“Correlations seem synchronised across developed markets, and there doesn’t seem to be much evidence that any one country leads or is led by any other country.”

Comparing US factors with local factors in other developed markets, IAS found roughly two-thirds of a developed market’s stock-bond correlation movement is due to US factors–in particular, policy risks–and about one-third is due to local economic drivers such as sentiment.

“And, so, like most things in life, the answer is never clean cut and easy,” Weisberger said. “It’s not like CIOs ought to pay attention just to the US, and it’s not like CIOs ought to pay attention just to what’s going on in their local economy. They really need to keep paying attention to both local and global developments.”

Digging into the numbers, the co-movement between economic growth and interest rates is particularly interesting, Weisberger said, acting as a “fascinating summary statistic, if you will, for an investor’s economic intuition of what is fundamentally driving the economy.

To illustrate, he asked: “Is the monetary authority trying to surprise the economy with the degree to which they’re being overly easy or overly tight? Or is the monetary authority responding to the strength or the weakness of the overall economic environment?

“So, none of this is about the level of interest rates, or the level of inflation. In our framework, it’s all about co-movements and more fundamental economic drivers. I think there’s a very important distinction.”

The shift to positive correlation could mean “a more volatile world” from the perspective of a balanced portfolio, Weisberger said, increasing the risk of larger and more damaging tail outcomes.

“Some of the risk metrics that used to be achievable–you know, a certain level portfolio volatility or a certain target Sharpe ratio–may no longer be achievable when you don’t have that extra buffer coming from negative correlation reducing volatility in the portfolio,” Weisberger said. “You just don’t have that anymore.”

Investors may either need to increase their risk budgets or, if they can’t do that, accept lower returns, he said. They will need to look to other asset classes to play the defensive role of bonds, although there are no obvious stand ins.

Investors also need to ask themselves whether they should assume negative or positive correlation in their forecasts, or take a more agnostic approach, he said.

Inflation dominated the discussion at a recent board meeting at the $200 billion Teacher Retirement System of Texas. Meeting in person at the Austin-based fund’s headquarters, committee members heard how inflation is driving the market lower; remains fuelled by war in Ukraine, and has now triggered monetary tightening that threatens recession.

“We’ve had more discussions about inflation today than ever before,” said Jase Auby, CIO of the pension fund. “Inflation today is the worst it has been since 1982 – it’s a long time since inflation was at this level.” Auby was speaking after US CPI hit 9.1 per cent – although it has subsequently fallen a tad. In the 12 months through July, CPI increased by a weaker-than-expected 8.5 per cent.

The current market decline is less severe than the average US bear market – so far. Today’s ‘Inflation Breakout Market’ (the TRS investment team has named every bear market since the Great Depression) has so far seen the market fall 21 per cent over 178 days, compared to longer and sharper market falls triggered by the GFC and COVID when the market fell 56.8 per cent over 517 days before it bottomed and 34 per cent in 33 days, respectively.

Moreover, Auby noted that forward inflation prices, marked down at 2.3 per cent by 2024, indicate faith in the Fed’s ability to tame it by hiking interest rates. “We are seeing faith in the Fed’s ability to raise rates high enough to cause inflation to go down,” he said. “The Fed feels it can control inflation; and markets think so too.” Still, Auby warned of the recessionary implications of higher interest rates and flagged that Fed faith is also linked to economically painful historical examples. Former Federal Reserve Chairman Paul Volcker crushed inflation by raising interest rates to 20 per cent in the early 80s.

ENRI

While inflation batters most of TRS’s portfolio one corner in private markets, a 6 per cent allocation to Energy, Natural Resources and Infrastructure (ENRI), is bucking the trend. “We are expected to provide protection during inflation and have performed as expected,” Carolyn Hansard, senior director in the private markets division that includes a 17.7 per cent allocation to private equity and a 14.4 per cent allocation to real estate, told committee members.

The portfolio sets TRS apart from peer funds, many of which are shutting down fossil fuel investments. “We are one of the few people investing in energy and it’s paid off,” she said. On a one-year basis, the portfolio has returned 18 per cent while over a three and five year period it has generated an IRR of  5.7 per cent and 6.2 per cent respectively.

Natural Gas

TRS is currently eyeing investment opportunities in natural gas. Europe’s scramble to find alternative sources of gas away from Russia after the invasion of Ukraine has spiked demand for natural gas. Demand is also set to benefit from gas now being labelled a green investment by European Union policy makers alongside nuclear energy. “Demand for gas has led to record prices across the globe,” said Hansard.

US groups, able to produce LNG cheaply, are poised to take advantage of global demand. TRS is eyeing LNG infrastructure opportunities especially export facilities on the US east coast which could provide a valuable alternative export point for north eastern producers, currently relying on exporting facilities on the Gulf coast. “Growth in gas demand is also a US story,” she said. “US exports are currently 10 per cent but they are expected to climb to 25 per cent.” Moreover Canada, which has plentiful gas, also lacks LNG export facilities. “The only way to ship it [Canadian gas] is to get it to the Gulf coast,” she said.

Hansard said TRS has been investing in natural gas for the last four years in a range of LNG and pipeline facilities across the US. Today, unknowns include the European energy crisis actually accelerating the transition away from fossil fuels altogether. She also questioned if one global gas price, and gas parity, will emerge.

The ENRI portfolio was set up in 2013 with fossil fuel investment at its core in the hunt for inflation protection and uncorrelated returns. Hansard noted that infrastructure investments in the energy sector have a lower risk profile and are less correlated to energy prices than direct investments in energy. Infrastructure has delivered the most consistent returns in the allocation, which has outperformed its benchmark six out of the last 12 years.

The portfolio is split between funds and principle investments. Hansard noted that although funds investments have outperformed principle investments in recent months, principle investments perform better over time – and fund investments give important access to these investments.

 

Examining and learning from the evolution of orthodox finance provides relevant insight to the evolution of ESG data and ISSB standards which like CAPM are simply social conventions. Greg Watson argues that adopting a “no single right way” mindset will create greater resilience in investment by promoting greater differentiation.

Increasingly heated debates on ESG investing and sustainability highlight the importance of a new mindset in finance.
The competitive landscape is described well by Bob Eccles: The balance of future practice is likely to be determined by a middle ground of investors who may be sympathetic to ESG but are wary of its inconsistencies and contradictions.

The key to reconciling the many competing positions is recognising how, hidden in plain sight, sustainability has ignited a revolution in finance’s use of “real-world” information. Fuelled by new data technologies, this up-ends the current theory foundations of orthodox finance, with significant practical implications.

Consequently, a new mindset is needed which recognises that finance and sustainability tools are simply social conventions: there is no single “right” way. Instead, such tools should be judged by pragmatism – specifically by whether they can build support quickly, deliver targeted real-world objectives, and evolve effectively over time.

The new mindset will prevent debate blocking action and help manage what comes next, not just measuring outcomes but also encouraging the behaviours that will bring change about.

Changing the mindset starts by understanding the reasons why some obviously flawed financial modelling theories and practices have persisted for the last 40 years.

IS CAPM STILL APPROPRIATE?

The key example is the original Capital Asset Pricing Model (CAPM), a crucial part of Modern Portfolio Theory. After evolving over two decades, CAPM became dominant for valuations in just a few years in the 1980s. It remains the standard today.

It was already easy to critique CAPM 20 years ago. Its flaws included contradictory empirical evidence, risk defined by historic relative share price movements rather than real-world factors, ignored market imperfections, oversimplified equilibria, high sensitivity to growth and risk assumptions, and implausibly high long-term return assumptions in aggregate.

It was much harder to explain how CAPM’s dominant use arose and persisted.

Doing so required recognising that finance tools like CAPM – and now ESG data and the ISSB’s standards – are simply social conventions.

The reference to convention means there is no single “right” approach. Instead, social conventions compete with one another, the winners becoming accepted and reinforced by a community of users, with relevant standards and teaching. When change comes, it comes quickly.

Finance and sustainability tools both grapple with the highly complex social world, which has unpredictable dynamics. Moreover, models change the behaviour of the entities they are seeking to explain – in the language of social theorists they are reflexive and performative. The combination makes social behaviour impossible to model correctly using formal mathematics as CAPM seeks to do.

CAPM nevertheless won by creating the impression of certainty. Its evolution was enabled by a new technology – the PC. For a myriad decision takers, its apparent authority overcame its weaknesses. There was seemingly no alternative.

Today, new sustainability outcome data, new technologies such as AI and natural language processing, new ways to understand cause and effect using anthropology and narrative, new activist investment models and the rise of universal investors create the foundations for fundamental change.

These new foundations are now mature. It is nearly two decades since leading investors first identified that environmental impact’s correlation to risk and return could be positive. Empirical testing is well beyond that at CAPM’s launch. Complex technological innovations typically take this long to evolve.

Permanent change is inevitable, as new non-financial information, impact weighted accounts and net-zero pledges make it impossible to ignore the risk and return consequences of sustainability.

The big question is whether change will be managed effectively and on time. Doing so depends on swiftly overcoming traditional siloed thinking and demands for certainty, while managing complexity and maintaining the culture of discipline on which finance depends.

no single right way

The heart of the mindset advocated is recognising explicitly that there will not, nor ever can, be “perfect” solutions: there is “No Single Right Way”.

Instead, sustainability and finance tools alike need to be judged by whether they are “constructively pragmatic”.

Constructive pragmatism means building support quickly, delivering targeted real-world objectives, and evolving effectively over time.

In the new mindset, instead of exhaustive back testing and looking to the past, or to theoretically ideal views of the future, new tools should be designed based on first principles (abductive logic, relevance and common-sense) and developed at scale in fast, collaborative tests. The tests should be designed for active stewardship, empirical testing against intended objectives, transparency, rapid failure, learning and improvement.

The objectives need to be absolute, real-world measures rather than the relative targets of orthodox finance, including items with high intrinsic value which are hard to quantify. Realistic expectations about the level of certainty will help users overcome complexity.

Taking the ISSB as an example, constructive pragmatism boils down to whether it can quickly win support from companies, investors, nations, and activists to create a global baseline for sustainability reporting to investors. It will then need to show how it has supported local regulation, and that dynamic materiality has allowed sustainability metrics to evolve effectively as circumstances change.

The new mindset must also encourage new ways to enable change to go faster and further, such as systematically better collaboration, as well as evolving valuation practices to integrate sustainability, stakeholders, and innovation.

The no single right way mindset will create greater resilience in investment by promoting greater differentiation.

Consequently, the sustainability ignited, real-world information revolution also heralds massive changes in competition, collaboration and innovation in the investment industry itself.

Greg Watson is currently catalysing an initiative to encourage better innovation partnering through active investment stewardship. An extended version of this article is available here.

An overweight position in real assets and private equity, and an underweight to equities and bonds, positioned the Ohio School Employees Retirement System for success in the past year where it outperformed its benchmark by more than 3 per cent. But CIO Farouki Majeed is now even more convinced a stagflationary environment is likely and is positioning the fund accordingly.

In a year where equities market returns challenged public pension funds, the Ohio School Employees Retirement System whose investments are led by chief investment officer, Farouki Majeed, returned -0.49 per cent.

Surviving the year so well was due to the fund’s underweight allocation, by a combined 10 per cent, to equities and bonds. The fund has been underweight bonds for about 18 months, according to Majeed, and sits at the bottom of its allocation range in that asset class, about 7 per cent underweight.

A combined allocation of 32 per cent to real estate, infrastructure and private equity were the main drivers of performance and Farouki says he’ll look to add even more investments in infrastructure in particular, as the environment continues to baffle.

“We were protected quite a bit on the downside due to our significant allocations to real assets and private equity,” he says. “One of the things I was instrumental in doing here was getting rid of hedge funds and moving those allocations into real assets, as we needed income-oriented, stable returns. That has really helped us out in the past year.”

For some time Majeed has been concerned about the investment environment, back in May 2021 the growing debt to GDP ratio was driving his concerns and the decision to pull back from fixed income. At that time his concerns about growth and valuations meant expectations for double or even single digit returns were being questioned.

“We are in unfamiliar territory. I was more convinced of our fixed income position, that was an easier, more robust sort of a call to be underweight fixed income,” he says. “At the same time rising rates always causes equities to be re-rated because of a higher discount rate and that has happened.”

He says the fund was particularly underweight in developed equities, especially in Europe, where he thought the chance of a recession was higher than the US.

Stagflation more likely

Now he thinks that the likelihood of a stagflationary environment is increasing and is worried about how to position assets for that scenario.

“Stagflation is more likely now and it’s a concern,” he says “Inflation can come down from 9.1 per cent, but even if it stays around 5-7 per cent that is still pretty high compared to the Fed’s target of 2 per cent. We think growth will be quite slow. Even if we don’t enter a deep recession, with GPD growth at 0.5 per cent in 2023 and inflation at say 6 per cent that is a stagflationary environment, and then there’s nowhere to hide.”

Majeed says real assets will continue to be a focus for investments in that environment, and government bonds “might be a place to be” if the Fed backs off the interest rate hiking cycle.

The fund currently has 21 per cent in real assets and Majeed sees that nudging up to 23 per cent, with infrastructure in particular likely to increase. Real assets contributed a 24.5 per cent return in the past year with a 10-year return of 11 per cent. The private equity one-year return was 34.35 per cent.

Real estate currently dominates the real asset allocation, with a bias to US industrials and multi family, with infrastructure only making up about 5 per cent of the fund.

The team has also looked at other real assets including timberland and farmland but decided the prices were not as attractive as real estate.

Ohio’s bond target, which includes all types of credit, is 19 per cent and it currently sits at 12.5 per cent. Majeed says he may look to close that gap if the 10-year treasury rate gets above 3.5 per cent.

Separately the fund has 5 per cent allocated to private credit and Majeed says that asset class “might be another place to be in this environment”.

The equities will continue to be underweight for some time, and the correlation issues between equities and bonds is an ongoing concern.

“That is the biggest thing that has caused our portfolios everywhere to experience these negative returns,” he says pointing to credit and high yield being very correlated to equities. “If we were at target we would be 65 per cent in our bonds and equities but together we were about 10 per cent below so that helped us. Our portfolio is more diversified than most of our peers because of high allocation to private equity, private credit and real assets.”

All of the fund’s private assets are externally managed with about 25 GPs in private equity mostly focused on middle market and small market buyouts. In real assets the fund works with about 20 partners.

 

Risk mitigation strategies have provided an important performance seam at $95.7 billion New Jersey Investment Council, governor of the state’s main retirement plans. New Jersey’s allocation to hedge funds has mitigated the size of the drawdowns in public markets, committee members at the Trenton-based fund heard in a recent markets update.

New Jersey has an assumed rate of return of 7.3 per cent, above the current 6.9 per cent median for US public pension funds. It also has one of the lowest funded ratios of US public pension funds, according to the latest research from New York based nonprofit Equitable Institute. In Fiscal year 2021 New Jersey returned 28.6 per cent net of fees.

Macro and systematic strategies have performed particularly well like short treasuries and long commodities (boosted by inflation and the impact of Russia’s invasion of Ukraine on commodities) while long US dollar and short equity strategies have also done well.

“All in all, hedge funds have fared better than in past dislocations like 2008 and at the beginning of COVID,” Daniel Stern, senior managing director at external asset manager Cliffwater told the New Jersey board. In 2019, New Jersey dropped the hedge fund share of the portfolio to 3 per cent from 6 per cent following a spate of enduring high fees and mediocre returns.

In a hybrid approach, New Jersey invests directly with hedge fund investment managers and in a number of fund of funds, seeking diversification and uncorrelated returns from the strategy during times of significant sell offs and unanticipated periods.

Charting the allocations recent success, Stern explained that last year, many hedge funds actively de-risked, selling off and reducing risk levels. The approach meant they were able to protect capital ahead of the 2022 sell off, and position for an inflationary period and one of rising rates.

New Jersey’s RMS portfolio took off once the Fed began hiking rates and yields began to rise – and equities and fixed income sold off, he said. The 3 per cent allocation to RMS – equivalent to around $2.7 billion – has put on $147 million.

Looking ahead, committee members heard that the outlook for hedge funds looks positive because of enduring uncertainty. Alpha opportunities will emerge if geopolitical uncertainty continues, while rising rates and divergent Central Bank policies could all contribute to higher levels of volatility and greater dispersion creating an environment where hedge funds typically thrive.

“We expect continued, above average alpha generation for hedge funds and a stronger performance than we’ve had in the previous five-year period, and this is reflected in your asset allocation,” said Stern.

Shelter

Hedge funds and alternatives have been one of the few places to shelter in volatile markets.

Shoaib Khan, CIO, New Jersey Investment Council, told board members that public markets across the board are struggling. Equities across geographies and sectors, fixed income and real estate are all meaningfully down and providing few hiding places.

“Bonds have not proved to be the safety umbrella in this downturn,” he said, adding that losses in corporate credit and high yield fixed income have added to the sea of red.

New Jersey’s asset allocations are close to target for much of the portfolio. Unlike many institutional investors the pension funds allocation to private markets has not extended beyond its allowable range – yet. The only allocation that is over range is the cash equivalent, currently 9 per cent. Early in the year the fund reduced its exposure to equity and fixed income in favour of cash in a strategy that has pushed the allocation outside its range but is also providing protection in volatile markets and ensures dry powder on hand. The short duration allocation is also benefiting from a changing rate environment and earning a more positive return now than in recent years, he said.

The fund’s performance in public markets is in line with expectations, either aligned or better than benchmarks. However, the allocation to non-developed equities has underperformed the benchmark mostly since the portfolio tilts towards growth, and growth allocations have trailed value.

Khan, who joined New Jersey from Florida SBA and replaced former CIO Corey Amon towards the end of fiscal year 2021, said he is focused on the longer-term outlook; liquidity and the fund’s liabilities. He voiced confidence in the latest private market contributions providing some protection when performance numbers, which lag public markets, come in. Moreover, pockets of opportunity in some asset classes continue to exist like high yield, one area New Jersey is building the allocation.

High Yield

New Jersey recently decided to increase its allocation to high yield from two to four per cent, paring back on the allocation to Treasuries and investment grade to make room. So far, the allocation stands at 3 per cent, a 100-basis point increase from the end of last year, but still frustratingly lower than planned.

Building the high yield allocation while also maintaining performance is challenging. Particularly given the inverted yield curve makes it difficult to judge if economies are going into, or in, recession. Moreover, high yield is illiquid and broker-dealer risk budgets are lower.

“They are not actively looking to provide balance sheet,” Kevin McGrath, credit trader and high yield portfolio manager for fund, told committee members. It has led to various approaches to try and build the allocation to add mass and size more quickly.  For example, basket trades whereby investors trade 200-odd securities in one trade rather than individual bonds allow better execution and reduce transaction costs.

The committee heard how in the short-term high yield is attractive, with the opportunity to buy into aggressive dips. Red flags are starting to appear with stress and defaults rising as companies struggle to refinance their balance sheet.

The pension fund’s asset allocation is divided among five broad categories. According to the latest annual report the largest allocation was global growth (58.34%), which contains domestic equity, developed markets international equity, emerging markets equity and private equity. The income category (16.4 per cent) contains high-yield fixed income, private credit and investment-grade credit.

The defensive category (15.4 per cent) holds U.S. Treasuries, risk-mitigation strategies and cash equivalents, The real-return group (7.82 per cent) contains real assets and real estate. “Other” accounts for the remainder.

 

 

Outperformance in the current investment climate requires departing from the crowd.

“Fortune favours the bold,” says Kristin Magnusson Bernard, chief executive of Sweden’s AP1, the SEK420 billion ($41 billion) buffer fund, in an interview from her Stockholm office, at her desk despite peak holiday season in the Nordics.

“Holidays, for me, have become an on-off thing this year.”

Don’t’ be passive

A renowned active investor, the team is constantly making assumptions, building scenarios and playing out the different ways strategies might perform.

It is shaped around an active approach to allocation focused on the global equity portfolio alongside active fundamental equity investment. Here the focus is on AP1’s Nordic small and large cap portfolio. The approach also extends to unlisted equity investments where AP1 owns companies in infrastructure and real estate and where Magnusson Bernard argues AP1 is actually the “most active.”

The team often meets every day – otherwise they get together at least three times a week – to discuss exposures.

“We check-in regularly, share analysis and the best way to execute,” she says. “We are always making decisions about the portfolio. Often it will result in nothing changing,  but even when we decide not to change anything it still constitutes an active strategy because we have made a decision.”

Going out on a limb

When going out on a limb, she stresses the importance of ensuring positions are sufficiently constrained so they remain a learning experience rather than risking performance.

“When you have strong views, it’s best not to have too few; don’t let them get too large so they pose a risk, and you get your fingers burnt.”

Formulating strong views and daring to act on them should also be cushioned by ensuring the investment team can always reverse a decision if it goes wrong; able to turn back when going out on a limb backfires.

Indeed, she is quick to own recent mistakes.

“We definitely stayed in the transitory camp over inflation for too long; we learnt something there,” she says.

One of them, ironically, includes the realisation that getting the big calls wrong doesn’t necessarily preclude performance.

Last year AP1 posted its strongest returns (20.8 per cent) since it was founded in 2001 despite believing inflation would be short-lived. The fund has just posted half year results of -9.4 per cent after expenses. AP1 targets a 3 per cent return after expenses in real terms over rolling ten-year periods, and 4 per cent in real terms over 40 years.

 Risk proofing

The majority of the portfolio is invested in listed assets making it more difficult to navigate market volatility.

Still, risk proofing strategies have included reducing the equity allocation by 10-15 per cent compared to last year and paring back on duration in the fixed income allocation.

Last year 61.4 per cent of the portfolio was in equity divided between global (42.9 per cent) and Swedish (18.6 per cent) stocks,  22.9 per cent in fixed income and 25.6 per cent in alternatives.

Other market downturn-busting strategies include taking maximum advantage of the strong dollar to reap the benefits of the exchange rate in light of the fact so much of AP1’s assets are in dollars, yet all liabilities lie in Swedish krone.

AP1 has an active hedging strategy whereby it is legally bound to hedge at least 60 per cent of the portfolio, she continues.

“When the dollar is strong this could mean up to 40 per cent of the portfolio is unhedged; if the dollar is weak, it could mean 80 per cent is hedged. It’s a powerful lever for us.”

She also believes the correlation between fixed income and equity is best explained by high inflation, suggesting the moves in tandem will continue for as long as inflation remains elevated.

“During times of high inflation, we have seen this correlation between equity and fixed income before,” she says.

European energy crisis

The outlook for the European economy is mixed. On one hand, economies face a herculean challenge reducing their dependency on Russian energy alongside high sovereign indebtedness.

“This makes it very difficult for the ECB to bring down inflation,” she says.

On the other, she notes that the European labour market is strong and the continent is also buoyed by a new-found political unity at the highest level as nations coalesce in support of Ukraine.

“If the ECB can get inflation under control, these positives will become more apparent. You could argue European equities have been oversold; many investors are starting to look at going back in although progress on inflation will be a factor here.”

That said, she doesn’t believe markets will stabilise until it is clear how much rates are set to rise, nor is it clear how assets will react to rising rates after ten to fifteen years of economic policy shaped around low interest rates and asset purchases.

“It would be much easier for equity markets to find a footing if we knew what rates were going to do; until then markets will remain tumultuous,” she says. Magnusson Bernard was recently appointed a member of the European Central Bank’s Financial Stability Contact Group (FSCG) tasked with helping maintain financial stability in the euro area.

Positively, sky high energy prices are allowing energy companies to invest, sparking tech advances and innovation (she notices a new circularity in building materials, for example) that will ultimately speed up the transition. “If we manage the short-term, I think there will be many sliver linings in the medium-term.”

Team spirit

One of the key learnings from the pandemic was ensuring the wellbeing of the team overseeing such an active strategy.

AP1 uses short-term consultants through the summer to provide extra resources during vacation (and peak times) so people can have time off.  Her holiday is only on-off this summer, but she insists her team take a break.

“You can sprint for a while, but you need to find a way to rest even though markets never stop,” she says.