Markets Trend Positively for Investors, but Uncertainty Remains

It is a challenging time to save for retirement. According to new data released today in Goldman Sachs Asset Management’s Retirement Survey & Insights Report 2023, the growing prevalence of hard-to-predict financial challenges could reduce U.S. employee retirement savings by up to 37%. This finding comes on the heels of ongoing questions savers and CIOs have about the state of the economy and its potential impact on portfolio performance.

According to GSAM, over the last year, more U.S. workers have increased their savings, and more believe their retirement savings are on track: 65% of U.S. workers are confident in their ability to meet retirement-savings goals, up from 57% last year. However, the number of things that could limit or delay retirement savings—what GSAM calls “the financial vortex”—have also increased over the same period. The vortex includes things like large emergency expenses, the reinstatement of student loan payments, and stepping away from work (and saving) to care for children or elderly parents. These hard-to-predict situations could have a bigger impact on retirement savings in a low-growth economic environment.

“While retirement sentiment improved over last year, the financial vortex remains a huge problem for many workers and retirees,” said Chris Ceder, a senior retirement strategist at Goldman Sachs Asset Management, in a statement accompanying the report. “Its challenges are largely immune to improvement in markets and the economy and will continue to impact new generations of retirement savers.”

Repositioning Portfolios

To stay out in front of uncertainty, investors may reposition parts of their portfolios. During a webinar presentation on GSAM’s findings, Alexandra Wilson-Elizondo, deputy CIO of Goldman Sachs Asset Management’s multi-asset solutions team and co-chair of its investing core, said GSAM has revised its economic forecasts for the second half of 2023.

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“The trajectory for growth and for the possibility of a recession have come down,” she said. “The trend is more friendly, but you have to be very cognizant of the long and variable lags of a hiking cycle. […] In our minds, there’s not enough risk premia in the market to be going out on the risk spectrum. We’re currently at what we consider very neutral risk stances in the portfolio.”

Wilson-Elizondo added that rising interest rates could positively impact investors, who are now earning a bit more on the cash in their portfolios. However, that has to be considered from an inflation-adjusted perspective, especially for those at or near retirement. Structural changes in the broader economy, she added, could also lead to more uncertainty over the next year as industries de-globalize and geopolitical concerns remain heightened.

“With the right instruments in a portfolio, you can take advantage of highly volatile markets,” Wilson-Elizondo said. “It’s about having less concentration risk in portfolios because, as you start to see higher base rates, you’re going to have default pickups that take place. We don’t expect it to be material, but it should ultimately be higher.”

With that in mind, investors should try to think about longer-term defensive strategies, Wilson-Elizondo said.

This forecast tracks with what global retirement consultant Mercer is seeing in the market. Mercer’s economic analysts wrote in a recent economic outlook that they anticipate the U.S. economy will “stall in the second half of 2023 and early 2024 as the assist from lower energy prices fades, consumer savings are used up and banks tighten their lending standards.”

While it is unlikely that the U.S. drops into recession, it is more likely that it enters a low-growth environment that could lead to uncertain portfolio outcomes, according to Mercer. Analysts anticipate that core inflation will also remain above the Federal Reserve’s 2% target for the foreseeable future as companies pass higher input costs onto consumers. The Mercer report suggested that emerging market equities are attractively priced in this environment and could help balance out uneven performance in the U.S. equities market.

Fixed Income Impact

Looking ahead, fixed income could have a larger impact on investment portfolios. Investors are already seeing higher yields, combined with a sizable return on cash. Analysts have suggested that if central banks slow down or pause interest rate hikes, traditional fixed income could end up outperforming other parts of investment portfolios.

On the credit side, Mercer suggested that, “both investment-grade and high-yield credit spreads appear to remain at reasonably attractive levels and may offer sufficient compensation for taking on default risk. We think EM [emerging market] local-currency debt is attractive, driven by cheap currencies and attractive bond yields.”

In a recent hedge fund outlook, Man FRM analysts wrote that investors will want to keep a close eye on where rates end up, especially when it comes to government bonds. “We have market pricing suggesting an objectively cheap asset, which is caught between a probable path of getting slightly cheaper in the short term and an improbable path of rallying strongly, hence the skewed risk-reward pay-off,” the outlook stated.

Managing this situation could be tricky for investors, not just in their investment grade bond portfolios, but also in their hedge fund exposures, and may lead to some repositioning later in the year.

Man FRM noted that the systematic macro universe of hedge funds currently holds “significant” short exposure to government bonds, which could shift if government bonds reverse their downward trend. What’s more, “hedge funds are typically seen as diversifiers to equities and other risk assets; there is a stronger argument that government bonds can once again fill that role from today’s starting point, especially if inflation does come under control.”

Tags: Alexandra Wilson-Elizondo, Chris Ceder, Emerging Markets, Goldman Sachs Asset Management, Hedge Fund, Man FRM, Mercer, retirement savings

The New Zealand Superannuation Fund credited a strong rebound in global equities for propelling its investment portfolio to an 11.87% return, before taxes, for the fiscal year that ended June 30, raising its asset value NZ$9.7 billion ($5.7 billion) to a year-end record high of NZ$65.4 billion.

The pension fund just missed its benchmark portfolio’s 12.03% return for the fiscal year, but the performance was still a significant improvement from last year, when the pension fund lost 6.99%. According to NZ Super, the portfolio also outperformed its Treasury Bill return benchmark, a measure of the government’s cost of paying into the fund, by 8.1% or NZ$4.7 billion.

“In FY 2022, equities and bonds both performed poorly—an uncommon scenario—and our active management strategies contributed significantly to our final result,” said Matt Whineray, CEO of the Guardians of New Zealand Superannuation, which manages NZ Super, in a release. “This year, global equities performed very well, and the Super Fund slightly underperformed the reference portfolio.”

“What matters to a long-term investor like us is total fund performance over time,” Whineray said in the release. “Over the life of the Super Fund, our active investment strategies have generated NZ$15.1 billion more than a passive, index-linked strategy would have achieved.”

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The pension fund also reported five- and 10-year annualized returns of 7.98% and 10.75%, respectively.

Whineray said the pension fund will continue to be heavily weighted to equities but added that “where we see an opportunity to diversify, optimize risk settings and add value through active investment strategies, we will take it.” He also said that despite the strong performance during the fiscal year, the global investing environment ahead remains a challenge.

“Core inflation remains high in many markets, leaving open the possibility of further interest rate rises,” Whineray said in the release. “At the very least, it would seem any decrease in interest rates may be more gradual and further away than might have been expected Our expectation is that will lead to lower returns overall as central banks prioritize reducing inflation over fostering economic growth.”

Guardians Chair Catherine Drayton said a search for a successor for Whineray, who announced his retirement earlier this year, is underway and that the board hopes to make an announcement later in the year.