While money management sources are split as to how far the trend of deglobalization has to run, one thing's for sure: It's going to be a good opportunity for active management.
Exacerbated by Russia's invasion of Ukraine, deglobalization is set to slow trade, hit supply chains and create regional blocs. For institutional investors, the challenge is whether their definition of diversification and their approach to investing — particularly if they favor passive allocations — are still relevant.
"Globalization, by most or all of these metrics, seems to have peaked several years ago, and has been either flatlining or declining since," said Jared Gross, New York-based head of institutional portfolio strategy at J.P. Morgan Asset Management, which manages $2.77 trillion in assets.
He said deglobalization has the potential to create regional trading zones, or treaty-based trading partner communities that are smaller, less diverse and potentially higher cost than the full global economy.
"(It is) the idea that you want to base your trading relationships on not just the cheapest partner or potentially even the partner with the highest quality products, but partners who share a kind of mutual sense of self-interest," he said.
Regional trading blocs, as well as economies and companies that can benefit from a more challenging environment, will make a great case for active management, according to Mr. Gross.
Other sources agreed. "More volatility and more uncertainty requires the expertise of those that know what to do," said Luca Paolini, chief strategist at Pictet Asset Management, based out of Geneva, Switzerland. "But we (active managers) need to prove that we can deliver that."
Mr. Paolini added that deglobalization makes passive investing less appealing for institutions' portfolios as more business fragmentation means less correlation among stock prices and more opportunities to outperform benchmarks.
Pictet Asset Management had 213 billion Swiss francs ($223.1 billion) in assets under management as of June 30.