Pension funds around the globe are being forced to reconsider the way they invest as they grapple with the impacts of geopolitical risk, central bank intervention and the developing digital economy, said retirement executives.
Delegates at the Pensions & Investments WorldPensionSummit on Wednesday, held in The Hague, Netherlands, heard that while the world is in a period of synchronized growth, huge challenges remain.
Olivier Rousseau, executive director at the €36 billion ($42.5 billion) Fonds de Reserve pour les Retraites, Paris, said: "Clearly it is very hard for us managing a portfolio to call the geopolitical events, and it is probably wiser not to try to time (them). I maintain it is a more than average dangerousness on the geopolitical situation, which at least would justify demanding a slight extra risk premium on all our risk assets."
Mr. Rousseau said there was a specific risk premium for French assets, which his plan was able to earn, because in the run up to the 2017 French elections investors outside France had a negative opinion of assets based there.
Mr. Rousseau said investors are also operating "in the context of great manipulation, engineered by the central banks" — the application of which was a good thing to prevent any potential future financial depression. "But the fact is all asset classes have been contaminated by the manipulation of the interest rate curve operated by the central banks — everything is expensive or very expensive. It is not easy for us," he said.
He described infrastructure assets as "expensive because the hunt for yield in anything that looks like a bond is expensive."
"Infrastructure should be a fantastic game, but returns will disappoint," he said. Alternatively, real estate is "somewhat interesting because it is seen as a boring, old-style illiquid diversifier and therefore relatively less expensive."
Regarding traditional bond investments, Mr. Rousseau was more negative. "The feast is absolutely finished by now," he said. "Bonds are essentially a dangerous element in your portfolio."
Developments in Malaysia are also pushing the country's $165 billion Employees Provident Fund, Kuala Lumpur, to reconsider its asset allocation, said Datuk Shahril Ridza Ridzuan, CEO at the fund.
Just like other Asian countries, Malaysia is "rapidly digitizing," he said in a keynote presentation. "Malaysia has one of the highest penetrations of Internet devices, social media, home shopping … and this is increasingly driving even our own investment philosophies."
Mr. Ridzuan said the fund is a long-term investor and is investing increasingly in growth in technology and the disruption of traditional businesses. He gave the example of one of EPF's big investment themes on a global basis, "shifting away from retail properties to logistics to essentially capture the value chain that exists in the supply chain of the Internet economy. For a lot of pension funds and retirement savings funds, these are themes which resonate and which essentially have to be captured" — otherwise investments and value will be disrupted and "essentially disappear," he warned.
Mr. Ridzuan added in the panel session with Mr. Rousseau that while fixed income is not particularly attractive as an investment, assets need to be 30% invested in fixed income due to the EPF's mandate of capital preservation.
Amy Resnick contributed to this story