Uncertainties about what to do in rebalancing and the uncharted waters of central bank accommodation are among the things that'll bring sleepless nights to investment executives and money managers in the coming year.
“The scary thing is the thing you don't expect,” said James Keohane, president and CEO of the C$47.4 billion (US$44.6 billion) Healthcare of Ontario Pension Plan, Toronto. “It's hard to know what there is in store.”
“Everything keeps me up at night,” said David Cooper, chief investment officer of the $28.3 billion Indiana Public Retirement System, Indianapolis.
“Asset allocations are probably out of whack right now,” generally overweight stocks and underweight fixed income, added Tim Barron, CIO at investment consultant Segal Rogerscasey in Darien, Conn. But given the 2013 jump in stock prices and the ongoing concern over core fixed income, he added, “how do you feel about selling stock and buying fixed income? That's a struggle.”
What's expected is the continued tapering of the Federal Reserve's quantitative easing strategy, and that equities will continue to see growth, but not at a breakneck pace. The Fed started the tapering ball rolling on Dec. 18 by announcing that beginning in January it will buy $75 billion in bonds each month, down from the $85 billion it has bought since September 2012. It also pledged to keep short-term interest rates “exceptionally low,” according to a Fed statement Dec. 18.
The Fed effect will be a short-term one,” said Anthony Werley, New York-based managing director and chief portfolio strategist in J.P. Morgan Asset Management's endowments and foundations group. “The short-term volatility from whatever easing up the Fed does will cause concern.”
In alternatives, value-added and opportunistic real estate is “something to get quite excited about” in the new year, said Mr. Werley. “To me, a high value-added/opportunistic portfolio is like (2013's) small caps,” he said. “There are some real opportunities in higher-risk real estate.”
But hovering over 2014, Mr. Werley added, is the issue of what inflation numbers will be. “You can't completely take your eyes off deflation. If you don't get the economy to accelerate, what is the "new normal' will become the "old normal,' with price/earnings ratios not justified.”Mr. Barron agreed real estate provides some attractive opportunities for income and protection from inflation and a breakdown in equities, along with timber, agriculture and infrastructure. He also said hedge funds will continue to get inflows despite the tepid returns of the past year, since many institutions' commitments to the asset class remain unfulfilled.