Conference Presentation, Panel
Asia Summit 2015 - The View from Institutional Investors: Where Will Returns Come From?
- Panelists anticipate a future characterized by prolonged slow global growth, low nominal returns, and significantly higher market volatility, which is expected to persist for several years and diminish the relative attractiveness of passive index investing.
- Significant strategic shifts are expected toward active management in emerging markets, specifically China, where investors are advised to avoid broad indices in favor of selecting individual businesses or utilizing private assets like infrastructure, real estate, and renewable resources to capture operating efficiencies and illiquidity premiums.
- Valuation opportunities are projected to exist with emerging markets trading 30% to 40% below fair value and European markets 20% to 30% below, creating potential entry points for strategic tilts into specific regions or asset classes where prices have collapsed despite underlying growth narratives.
- A heightened focus on cost efficiency and fee management is expected as low-return environments increase the importance of fees, while the availability of persistent investment skill is viewed as limited and difficult to acquire consistently across active managers.
- Smart beta strategies focusing on value, permanent risk premiums, and low volatility are anticipated to gain prominence as investors seek to leverage endowments rather than rely on specific active skills, alongside potential five-year exploration projects into Africa despite concerns regarding reputation risks from corruption.
- Risks include the possibility of sharp market declines which are viewed as buying opportunities for cash-rich funds, the persistence of volatility in capital markets regarding Chinese government intervention, and the potential for active managers to inadvertently increase emerging market exposure despite attempts to reduce it.
- Specific timeframes for these outlooks range from the next two to three years for re-evaluating opportunities and strategic adjustments to decades for sustained absolute growth in certain regions, with a specific five-year horizon noted for accessing discounted assets following market downturns.