Top questions for institutional investors

Greg Crawford: My name is Greg Crawford. I'm the director of content solutions at Pensions and Investments. I’m pleased to welcome Chris DeMeo, Client Solutions Group, Head of Americas at Aberdeen Standard Investments. Chris is joining us today to talk about what's on the mind of institutional investors. Welcome, Chris. It's great to see you.

Chris DeMeo: Thanks, Greg. Great to be here.

Greg: We've made it through a year of the pandemic when pretty much everything changed. What are asset owners looking for today, as we embark on a new year with the COVID-19 vaccines rolling out but still weak economies, stock prices that are strong, low interest rates and a new administration in Washington?

Chris: Obviously, it's been a very challenging year on a lot of different fronts and we'll focus on the investment perspective here. Despite the volatility that we saw during 2020, for the most part institutional investors stayed the course and that certainly served them well. That being said, we're now in, as you mentioned, a different regime and a lot of things have changed since 2020. Looking forward to 2021, what will fiscal policy look like? What will monetary policy look like? Will we start to see additional stimulus from this administration? How is that going to translate into either investment opportunities or investment risks or for investors?

Certainly, a lot of investors are very concerned about yields and inflation. Where do you invest now, with interest rates so low, not only here [in the U.S.], but globally? Also, could there be more inflationary pressure, given some of the policies that are being put in place? The jury's still out on that. We're trying to help our clients recognize that yields will continue to stay low, and we believe that's going to make the bond market much more challenging in terms of meeting the investment goals for many investors. That being said, there are a lot of investors that continue to need to have a strong core fixed income portfolio, especially pension funds or other investors on an LDI path as well.

Looking outside the United States, emerging markets continue to be, we think, an area of opportunity. But again, how will those low-yield environments impact those opportunities? We also think that potentially currency risk might actually be somewhat dampened going forward. But certainly, those are real issues. The equity markets in general have served investors well, and we think, quite frankly, continue to be a bright spot, but certainly not without risk. There's potential for volatility, whether it's longer term, or just spikes in volatility, that’s on our clients’ minds. That’s because most of our clients need to have a significant equity exposure to be able to meet their goals. That leads into alternatives and diversification, where we continue to see a very strong appetite, whether it's more liquid alternatives or it’s more private opportunities. We’ve having a lot of interaction with our clients from a total portfolio perspective, but also in individual areas where Aberdeen Standard Investments may be able to provide research, analytics and, ultimately, implementation.

Greg: You’ve laid out a lot for us and touched on a number of issues that your clients are facing. What are the two three main questions or issues that clients are asking about?

Chris: For pension fund clients who are on an LDI path, they are very concerned about ‘where do I go from here in terms of our LDI program?’ We certainly look at core fixed income and longer-dated fixed income that is going to be the backbone of a lot of those strategies. We're also talking with them about some of the risks that they may have with respect to concentration, there's a limited number of long-dated corporate securities, for example, that they can get, so other ways to diversify that while still staying on their long-term glide path and maintaining the type of duration that they need. There’s clearly a concern on the other side, say for endowments and foundations, who are probably a little bit more worried about inflationary or potential inflationary pressures. So where does that leave them in terms of looking at either their overall total portfolio, but also in their fixed income portfolio. Again, we've been very concerned about Treasuries in terms of not only the yields, but in how much downside protection they're really going to have. Unless you're a very strong believer in negative rates, and we certainly see that as a possibility, but it's not our central theme.

Again, for the most part, our clients want to be in equities. We're strong believers that this is an area where investors in the long term should be well served. But we're also having discussions with them about explicitly managing some of the more tactical or shorter-term risks that the equity markets perhaps have. And we would allow that the uncertainty in the markets and a new administration could mean those shorter-term volatility spikes. We’ve certainly seen some interesting volatility spikes over the last couple of weeks driven by factors that normally wouldn't have been considered in typical asset allocation type of exercises.

Finally, I'd say that ESG certainly is top of mind for a lot of investors. We believe that there's certainly more tailwind now than there was, given the change in administration and some of their stated goals. That’s an area where we can help clients not only talk about specifically how Aberdeen Standard Investments implements ESG throughout our entire suite of investment solutions and products, but also top-down help them understand a little bit more about where they want to go with their ESG program. What are some of the ways ESG will impact their investment policy, their governance? How are they going to access ESG not only through public markets, but also through private markets as well? So being able to talk to them from that top-down perspective, as well as that bottom-up implementation perspective, has certainly been part of a lot of very robust conversations that we're having with clients in that area.

Greg: You have overlaid everything, Chris, with the idea of the investment objectives of your clients, whether it's meeting a return target, getting to a funded status level, or income. Is the growing interest and use of passive investments playing a role in those conversations as well?

Chris: As you mentioned, while we're obviously big believers in active management in areas where we do see active management adding a key role, passive investments also play a very key role. Then not only within the traditional space of equities, bonds and traditional investments, but we're seeing a lot more interest in alternatives, for example, more liquid diversifiers, as well, where you have a way to systematically access either a risk premia or some way that you can either protect on the downside or actually systematically gain returns. So we definitely see that interest in passive investments, and we are talking to our clients about incorporating both passive and active ways throughout their portfolio in order to ultimately, as you say, meet their mission.

Greg: As you've laid out for us, Chris, a lot of cross winds in terms of there being some headwinds, some tailwinds. Do you have an overall outlook for pension plans for 2021? What will they be looking for, and obviously, we've talked about meeting their return or their investment objectives, within the context of this macro environment that you've painted for us?

Chris: Corporate pension funds, if you're looking at where they are relative to a funded status basis, are just about breakeven since last year. While they benefited for the most part in their asset portfolio, the falling rate environment increased their liabilities. So pension funds are where they were, for the most part. Most corporate pension funds are, either explicitly or implicitly, on a glide path that is a systematic way to move from riskier assets to less risky assets, as the plan continues to get better funded.

A lot of pension funds are looking to get back on track. Last year was a very volatile year, and many either continued on their glide path or perhaps even paused on their glide path. Now we're looking to figure out, how do get back on it? Given the environment we're in now, is this the right time? Or should we actually take a look at adjusting how we think about our glide path with what could be a higher risk of rates potentially going up, especially on the longer end? Could that actually have an impact on how pension funds allocate or where they allocate from return seeking to more LDI type of assets. Public pension funds, again, for the most part, are going to be very concerned about liquidity. A lot of them have very large outflows that are coming up in the next five to 10 years, so that needs to be looked at. There's a lot of interest in continuing to look at private investments. But we also take a look at their liquidity budget. Cash flows and those type of elements are a very important part of looking at any investment strategy, and they're always part of the discussions we have.

Greg: There's a lot going on, as I mentioned before, so we'll have to touch base throughout the year, Chris and see how things are playing out because there are a lot of uncertainties out there that your clients are working through as things change. We'll stay in touch and connect again to see how things are going later in the year. Thanks for joining us, Chris, and it is really helpful to hear your views on what's going on out there for institutional investors. And for all you watching this, thanks for watching and stay safe and stay healthy.