Editor's note: With President-elect Joe Biden poised to begin a new administration in January, Pensions & Investments reached out to plan sponsors and money managers to ask them how or whether their investment thesis has changed in the wake of the U.S. election, as well as their chief concerns. Answers have been edited for space, style and clarity.
What they are expecting in the wake of the election
Christopher J. Ailman, CIO, $257.9 billion California State Teachers' Retirement System, West Sacramento
How has your investment thesis changed as a result of the U.S. elections?
Not one bit, tell me how the economy is doing. Besides, (Federal Reserve Chair Jerome) Powell is still Fed Chair, right?
What is your chief concern with how the election may affect the investment management and/or performance of the assets you oversee?
No concern as a result of the election. My chief concerns are COVID-19, the economy, and that Powell said to expect lower rates for longer. That's what matters.
Marcus Frampton, CIO, $65.4 billion Alaska Permanent Fund Corp., Juneau
Changes? APFC's investment approach does not change materially based off any one election cycle. Some of the geopolitical and international trade risks, however, are likely materially reduced in the White House taking a more collegial approach vs. the outgoing administration's more aggressive and transactional approach to diplomacy and trade. On the margin, this dynamic makes us slightly more risk-tolerant with internationally domiciled assets, but this does not represent a major shift in strategy.
Concerns? Our biggest concern with respect to our ability to achieve our performance objective going forward (CPI + 5%) is the very elevated valuation environment today for stocks, private equity, venture capital, real estate and other asset classes coupled with generationally low yields on fixed-income investments. This election has done nothing to change this challenging environment for go-forward returns other than seeming to exacerbate the dynamic with the recent surge in stock appreciation.
Lori Heinel, deputy global CIO, State Street Global Advisors, Boston. SSGA had $3.15 trillion in assets under management as of Sept. 30.
Changes? We've been gradually increasing our allocation to risk assets — both equities and credit — as economic conditions have improved. We continue to look for good relative value and areas where the policy support provides tailwinds. We favor high-quality growth names in the technology, health-care and consumer sectors as well as investment-grade credit.
Concerns? The combination of getting the election behind us, the prospect for additional fiscal stimulus and the announcement of a promising vaccine likely buoy the economy and markets in the near term. But questions remain about the durability of any recovery, and given valuations, we might see some weakness in the back half of next year.
Edward Perks, CIO, Franklin Templeton Investment Solutions, San Mateo, Calif. Franklin Templeton had about $1.4 trillion in AUM as of Oct. 31.
Changes? With Biden's victory declared, and with a Republican-controlled Senate projected to be the more likely outcome, a large part of the current status quo should remain in place. We anticipate continued Washington gridlock, perpetuating much of our pre-election investment theses. Our investment thesis has been predicated on continued muted inflation pressures, supportive monetary and fiscal policies, and early cycle business conditions. This should continue an economic recovery supportive of risk assets, particularly equities.
Some of the changes we expect with a Biden presidency include a stronger focus on domestic issues, particularly COVID-19. We see a more steadfast, multilateral approach to China and other trading partners that should be more effective in driving improved business confidence and trade. This should have positive implications for health care and emerging markets. We are also positioning for executive order reversals, such as additional oil drilling restrictions and environmental regulation, that will also have sector implications. For example, any restriction on corporate share buybacks would benefit U.S. credit more than equities, on the margin.
Concerns? Rising COVID-19 cases during the upcoming winter season remains one of our chief concerns, particularly if this could lead to shutdowns similar to what we saw in March, although the fact that scientific and societal knowledge of the virus has progressed tremendously should help. Other concerns include elevated valuations for risk assets due to Fed intervention, particularly growth equities and high yield corporate bonds. We remain concerned about the issues surrounding global populism as seen in the severely divided U.S. election outcome.
In this transitional period for U.S. politics, ahead of the Georgia Senate runoff, there is still the possibility that supportive fiscal policy will disappoint market expectations, which could be particularly worrisome if the timing coincides with a surge in COVID-19 cases and associated lockdowns.
Bob Maynard, CIO, $19.4 billion Idaho Public Employee Retirement System, Boise
Changes? I never saw, and still don't see, any change in direction nor any increased concerns from the election — whichever way the legal disputes may land. Minimal impact on actual conditions — rhetoric will change, but basic China policy will be roughly similar, COVID-19 will fade over two years and may change by a few months, etc.
Concerns? Overall, still marginally more optimistic than most of my peers. With (the Nov. 9) Pfizer rally, for example, we are at record all-time highs, far over our needed return for this fiscal year — we may be hitting double digits — and are in the mid-90s percent in funded status — we may end the day hovering above or below 95%. If this is an investment crisis, it's the best one I've seen in the four to five decades I've been around the business!
Darrell Spence, economist, Capital Group, Los Angeles. Capital Group had $2.1 trillion in AUM as of Sept. 30.
Concerns? While there is the risk of general uncertainty itself, the bigger question is if that uncertainty ultimately delays fiscal stimulus until quite some time after the election or even into the new year, which would likely damage the economy and make a recovery more challenging.
James Keenan, chief investment officer and global co-head of credit, BlackRock's alternative investments unit. BlackRock had $7.81 trillion in AUM as of Sept. 30.
Changes? Clarity around the U.S. election outcome results removes one major source of uncertainty from markets. We could still see small bouts of volatility as markets digest policy risks including the transition of power, further fiscal stimulus, and President-elect Biden's personnel appointments. Recent catalysts such as positive vaccine news, a contested election and likely divided government reduce the likelihood of additional fiscal stimulus near term. However, we're optimistic for support in 2021, which we expect to be pro-cyclical.
The October U.S. employment report reinforced the continuing stabilization in growth. Corporate earnings for Q3 are nearly complete with results exceeding expectations. More stringent lockdowns in certain regions could be a drag on the short-term pace of improvement. But progress on vaccines significantly mitigates longer-term threats associated with the virus.
Longer term, we still see a recovery that is led by global stimulus with low rates (a supportive backdrop for credit), though the shape of the recovery will differ by industry and region. We believe monetary policy will carry relatively greater importance in the U.S. recovery given the likelihood of continued divided government.
Shundrawn A. Thomas, president, Northern Trust Asset Management, Chicago. NTAM had $1.1 trillion in AUM as of Sept. 30.
Changes? Our five-year outlook of slower economic growth, following an upfront rebound remains intact. We rated a Democratic president, Republican Senate and Democratic House combination as the most favorable outcome for domestic growth given four scenarios we modeled. Market participants prefer stability in government policy and the expected outcome of a split government resulted in our tactical adjustment to moderately overweight risk favoring high yield, global listed infrastructure and investment-grade bonds. Over the long term, there is no material difference in risk-adjusted market returns under Democratic or Republican administrations.
Concerns? The near-term risk of insufficient fiscal stimulus is our principal concern.
Greg Peters, head of multisector and strategy, PGIM Fixed Income, Newark, N.J. PGIM Fixed Income had $946 billion in AUM as of Sept. 30.
Changes? Not really, politics matters a lot less than we think.
Concerns? We have a little too much comfort around divided government. Divided government is the least good scenario because you don't get enough fiscal (policy). The fiscal thrust is incredibly important.
Now, I don't know what kind of package there will be. I am not convinced we're going to have much "Kumbaya" (if the House and Senate are controlled by different parties). Regardless of what happens politically, we're in a low growth environment (with) low inflation. I don't see much changing.
Richard "Shep" Perkins, chief investment officer of equities, Putnam Investments, Boston. Putnam had $178 billion in AUM as of Oct. 31.
Concerns? I expect some stimulus in the next three to four months (but) not as much as if Democrats controlled the House and Senate.
Lower stimulus would lead to lower growth...Lower interest rates would benefit the equities markets...This would help growth companies.
The last year has been a great reminder on how tricky stock-market timing can be. 2020 was a picture-perfect example.
John D. Linehan, chief investment officer of equity and vice president, T. Rowe Price Group, Baltimore. T. Rowe Price Group had $1.3 trillion in AUM as of Oct. 31.
Changes? I don't think (T. Rowe's strategy) has been affected. We are long-term investors. My time horizon is three to five years.
You need to be careful about having a knee-jerk reaction to elections.
You will have to be more conscious of the regulatory environment before you make an investment. ... You have to have a more heightened sensitivity.
Concerns? Long term, a deeply divided electorate will probably cause dysfunction. Politics is becoming tribal. … It's not productive for the country or the economy.