Northern Trust: Money Managers Wary of Geopolitical Risk, US Slowdown

The market may be becoming too complacent, based on measures such as the Chicago Board Options Exchange Volatility Index, according to a second-quarter survey of investment managers by Northern Trust Asset Management. This leads 63% of the 100 survey respondents to be cautious about a possible market selloff.

In addition, many of these investment managers see US equity valuations as stretched, according to the Chicago-based asset management firm, with only 36% of respondents believing that equities are undervalued or fairly valued, the lowest level ever since Northern Trust initiated this survey in 2008. Many, at 86%, see European equities as undervalued or fairly valued, and 88% believe the same of emerging market equity valuations.

“Although managers view US equity valuations as extended, fundamentals—GDP growth, low inflation and earnings growth—are still favorable,” said Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust Asset Management. “Even though survey respondents over the past few quarters have been increasingly less positive on US equity valuations, the US equity market has been resilient and has provided good returns.”

As for the biggest risks to the world equity markets looking ahead, geopolitical risks headed up the list, followed by the possibility of economic slowdown in the US, and US corporate earnings. Trade policy tapered off to risk number four, from its previous top position.

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US economic growth will remain stable, according to 60% of the respondents, while 29% expect that growth will pick up, down from 44%. More managers, at 50%, expect corporate earnings to rise, up from 46%. However, there has been a drop in expectations for interest rate hikes and inflation pickup, with 66% anticipating the former, down from 79%, and 42% anticipating an inflation rise, down from 63%.

And only 43% of these investment professionals are wary about fallout from trade wars between the US and its trading partners that could impact financial markets. As for the impact of the Trump administration’s plans to roll back the post-financial crisis rulemaking, 49% reported that their costs were up only modestly as a result of addressing such requirements.

Of the various US industry sectors, only 39% see financials as undervalued, and 32% each believe this of the energy and healthcare sectors. Only 15% see the information technology sector as undervalued.

Respondents also see emerging markets India, China, and Brazil as offering the most investment opportunities in the next few years, followed by non-US developed equities, with frontier markets Russia and South Africa offering the least opportunities.

They remain bullish on US small-cap equities, while being most bearish on US fixed income, followed by hedge funds and commodities.

Tags: Emerging Markets, geopolitical risk, Northern Trust, US equities

The C$135.5 billion (US$108.2 billion) British Columbia Investment Management Corporation (BCIMC), one of Canada’s largest institutional investors, reported an annual combined pension return, net of costs, of 12.4% for fiscal year 2017, beating a combined market benchmark of 11.7%

The return generated C$680 million ($542 million) in added value for its pension plan clients, said BCIMC. Infrastructure, private equity, real estate, and renewable resources outperformed for the calendar year, and exceeded benchmark returns. The company said that tactical decisions to underweight fixed income in favor of public equities provided increased returns.

“A key contributor was the outperformance of global equities relative to their benchmark,” said BCIMC. “In a low-return environment for fixed income, the decision to underweight nominal bonds added value, and was further enhanced by outperformance relative to the benchmark. Strong performance in illiquid asset investments also provided value-add.”

Gordon Fyfe, BCIMC’s CEO and CIO, said that over the past 20-year period, the pension fund exceeded its actuarial return requirements, and has added $7.7 billion in cumulative value-add.

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“Although annual returns provide us with a short-term perspective,” said Fyfe, “it is the longer term that matters.”

BCIMC has consistently outperformed its benchmark over the past one-year, four-year, 10-year, 15-year, and 20-year periods. Over the past four years, the fund returned 10.1%, compared to a benchmark of 9%; over the past 10 years, it has returned 6.6%, compared to a benchmark of 6%; over the past 15 years the fund has returned 7.4%, compared to a 6.8% benchmark; and over the past 20 years, it returned 7.7%, compared to a benchmark of 7.3%.

BCIMC’s “new investment model emphasizes a greater degree of active management over indexing strategies, and creating new and diversified sources of market return and active return to increase the probability of meeting our clients’ actuarial rate of return,” said Fyfe.

“Our strategy refocuses BCIMC to become an in-house asset manager that uses sophisticated investment strategies and tools,” said the company in its annual report. “By increasing the percentage of assets managed by BCIMC’s investment professionals, we will transition from a reliance on third parties to a more cost-effective model of managing illiquid assets.”

In fiscal 2017, the fund increased its managed net assets C$13.6 billion from the previous year, to C$135.5 billion. The fund’s asset mix as of March 31, 2017 was: Public Equities (48.3%, or C$65.5 billion); Fixed Income (19.2% or C$26 billion); Real Estate (13.5% or C$18.2 billion); Infrastructure (8.1% or C$11.0 billion); Private Equity (5.8% or C$7.8 billion); Mortgages (2.1% or C$2.9 billion); Other Strategies–All Weather (1.5% or C$2.1 billion); and Renewable Resources (1.5% or C$2 billion).

Tags: active, active vs. passive, BCIMC, British Columbia Investment Management Corporation, indexing, Returns