Asset owners will have some relatively new worries in 2015 — geopolitical risk, oil-price declines and the impact of changes in mortality tables on funding — but there’s also a familiar concern revolving around interest rates.
“Ask the people you spoke with last year; they said rising interest rates would be a concern,” said Roland Lescure, executive vice president and chief investment officer of the C$214.7 billion (US$186.2 billion) Caisse de Depot et Placement du Quebec, Montreal. “They did rise but not as much as they were expected to. It’s still a concern going into the new year. Interest rates are very important for us long term as portfolio managers and pension funds. Is it a bigger risk than before? I’m not sure.”
Dhvani Shah, CIO of the $34.2 billion Illinois Municipal Retirement Fund, Oak Brook, agreed. “With a backdrop of lower interest rates, the impacts of eventual higher rates on a variety of asset classes are interesting,” Ms. Shah said. “Where you are on the yield curve will be important. Infrastructure, real assets, rate protection all will be important.”
The economy will continue to be driven by central bank activity, said Gregory T. Williamson, director, trust investments, and chief investment officer at BP America Inc., Chicago. BP America has $7.78 billion in U.S. defined benefit assets. “If the U.S. sees strong employment and if we see a rise in inflation, the (Federal Reserve) will see if rates should be increased, at the earliest by the middle of the year. The impact of that will be on our rate-of-return assumption and valuation of liabilities.”
Adrian Orr, Auckland-based CEO of the NZ$27.1 billion (US$20.8 billion) New Zealand Superannuation Fund, said institutional investors are facing “some real tough air pockets” over the coming 12 months that will make it hard to add significant value to investment portfolios. That will “force us to work a lot harder with regard to our active strategies,” Mr. Orr said.