While inflation remains at the top of the list of preoccupations for pension fund and money management executives in Europe this year, the return of volatility and being ready to jump on opportunities afforded by challenging markets are also moving up the agenda.
The return of diversification in its more mainstream form — with equities and bonds poised to reverse the correlation trend of 2022 — also is a focus, as are opportunities from the green transition.
For APG Asset Management, the firm gained diversification last year from commodities and other alternatives, said Thijs Knaap, chief economist in Amsterdam at APG Asset Management, the €524 billion ($560.6 billion) manager running the assets of the €480 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands.
For 2023, "diversification between equities and bonds looks useful once again now that yields have come up. In the recession/inflation dilemma, the combination of equities and bonds should shield you from the worst. We will continue to diversify with alternatives as well," Mr. Knapp said.
However, geopolitical tensions and ESG-related demands are making it harder to diversify between regions and geography, so Mr. Knaap added that diversifying between asset classes can, partly, substitute.
Executives at the Pension Protection Fund, London, are anticipating buying opportunities in the markets, just as they saw in September when some U.K. pension funds got caught up in the liability-driven investment crisis after an announcement of unfunded tax cuts — which were later walked back by a new government — caused gilt yields to surge and prices to drop in a matter of weeks. That led to a liquidity crunch among some pension funds as they faced huge collateral calls on hedges in LDI portfolios.