Global Institutional Investors: Assessing U.S. Opportunities

Panel Composition and Fund Overview

• CIC International (China): Managed by Shaoliang Zhao; a sovereign wealth fund with ~$200B AUM, established in 2007, holding ~50% ($100B) of assets in the U.S. via public markets, real estate, and private equity.
• Cathay Financial Holdings (Taiwan): Led by Sophia Cheng; the largest financial holding in Taiwan with ~$250B AUM, where life insurance assets are ~$160B; currently holds >20% of life assets in the U.S. (via fixed income and equities).
• Afore Banorte (Mexico): Managed by Juan Manuel Valle Pereña; the largest pension administrator in Mexico serving 9.5M workers with ~$40B AUM, legally permitted to invest 20% abroad; currently investing via mandates in Europe and Asia, with U.S. entry planned within six months.
• Victorian Funds Management (Australia): Led by Lisa Graham; manages ~$55B for the state of Victoria, holding ~15% of the portfolio in U.S. assets across infrastructure, property, equities, and direct lending.

Valuation and Market Outlook

• General Sentiment: Panelists characterize the U.S. market as having fully priced valuations across traditional asset classes (equities and bonds), driven by abundant liquidity and low policy rates.
• Relative Value: Despite high valuations, the U.S. remains the preferred destination due to solid growth, extremely low unemployment, and being the first major economy to exit deflation.
• Avoidance Strategies:
  • High-yield bonds and non-investment grade debt are being avoided or minimized due to lack of risk-adjusted returns (e.g., Cathay Life limits non-investment grade to 6% of assets).
  • Callable bonds are being reduced, with Cathay Life limiting this exposure to 5% of assets.
• Forward-Looking Expectations:
  • Panelists expect a "low return" environment over the next 2–5 years, necessitating a shift in investor expectations and a focus on liquidity premiums.
  • There is a consensus that a "once-in-a-decade" correction could occur if fundamentals fail to catch up to current valuations.

Strategic Asset Allocation Shifts

• Private Credit: A key growth area for multiple managers (Cathay, Victorian) due to illiquidity premiums and better risk-adjusted returns compared to public high-yield bonds.
• Barbell Approach:
  • Moving toward passive, liquid assets to ensure flexibility.
  • Simultaneously allocating to illiquid alternatives (private credit, direct lending) to capture higher yields and illiquidity premiums.
• Private Equity: Victorian Funds Management is exiting the private equity space due to reputational risks and operational complexities, though they maintain interest in private credit and direct lending.
• Infrastructure: Significant interest in U.S. infrastructure, contingent on potential tax reforms, public-private partnership (PPP) frameworks, and asset recycling opportunities.

Currency Management and Hedging

• CIC: Maintains a long-term view with currency exposure generally neutralized; uses active currency risk only in limited amounts via external managers.
• Cathay Life:
  • Hedges ~60–70% of overseas assets; employs a complex basket of hedges including NDFs, AFS, and multi-currency baskets (Korean Won, Australian Dollar, Yen) against the TWD.
  • Maintains a dedicated team of 20+ hedging professionals and 15 economists to manage global volatility.
• Victorian Funds: Hedges 50% of equities to provide optionality against the Australian dollar; fully hedges fixed income; tilts exposure based on Australian inflation and macro factors.
• Afore Banorte: Hedging is mandatory due to peso-denominated liabilities; employs a strategy to minimize volatility caused by peso-dollar fluctuations, viewing the peso as a regional sentiment barometer.

Key Risks and Triggers for Reassessment

• Policy and Regulation: The primary risk for non-U.S. investors is U.S. policy uncertainty; triggers for reassessment include the delivery of fiscal reforms, infrastructure spending, and financial deregulation.
• Trade and Correlation: Afore Banorte highlights trade policy as a critical trigger; increased decoupling from Mexico could make U.S. investment more attractive due to reduced correlation, though immediate trade disruption is a risk.
• Market Structure Risks:
  • CIC warns against "crowded trades" and low volatility environments that encourage excessive leverage (short volatility).
  • Cathay Life points to emerging market debt levels (rising to >$20B from $2B in 2004) and potential thin credit spreads as systemic risks.
  • Victorian Funds Management cites the execution of tax and infrastructure reforms as the critical test for future valuation support.

Responsible and ESG Investing

• Cathay Life: Emphasizes "responsible lending" and risk pricing discipline to support SMEs; advocates for sustainable investing as a long-term policy rather than a superficial metric.
• Victorian Funds: A signatory to UMPRI (UN Principles for Responsible Investment); integrates ESG into due diligence and views stewardship as a growing focus, with no specific investment exclusions in the U.S. market.
• General Consensus: All panelists integrate sustainability into their investment processes, viewing it as a core component of risk management and long-term value creation.

Alpha Generation and Globalization

• Target Alpha:
  • Active managers target 100–200 basis points above benchmarks for long-term success.
  • A shift toward passive/ETF strategies is occurring where alpha is difficult to generate, with 50 basis points accepted as sufficient in public markets.
• Unique Exposure:
  • Investors acknowledge that high global correlation makes "pure" U.S. exposure difficult, as many multinational companies have significant global revenue streams (e.g., Apple).
  • Despite interconnectivity, the U.S. is still viewed as unique due to its innovation ecosystem, corporate governance standards, and the "flight to safety" during global crises.