Asset Allocation and Risk Management in a Fractured World Economy

Abstract

This paper co-authored by M. Nicolas J. Firzli and David Weeks looks at the notions of long-term asset allocation and the ‘quest for yields’ from the perspective of AUS, European and North American pension investors and board members (trustees), which where discussed at two recent global conferences organised by Singapore Economic Forum (SEF) and the G7 Pensions Summit (G7 P7).Unorthodox central banking policies and their excesses are discussed by the co-authors and other experts, including Baroness Ross Altmann, Member of the House of Lords and Suzanne Bishopric, Adv. Board Member, Singapore Economic Forum (SEF), fmr. CIO, UN Joint Staff Pension Fund (JSPF).The need for asset owners and asset managers alike to adjust to a "fractured world economy" in the "post Brexit era" is gauged with other experts, incl. Torbjörn Hamnmark, Head of Strategic Asset Allocation, Sweden's Tredje AP-Fonden (AP3) and the Rt Hon. Nick Sherry, founder & fmr. minister, AUS Ministry Superannuation & Corp. Law. The underlying geo-economic dynamics are analysed in light of “the ESG revolution" and the increasingly "datafied and non-linear" aspects of the world economy, which may eventually challenge (some of the more) traditional approaches to financial economics. The authors also look at the recent developments in quantitative investment research, deep data analysis, and the "ESG and sustainable finance" space – notably in light of the recent short-selling bans in some jurisdictions (Italy, Spain, France, South Korea etc), in relation to the lingering "Covid Crisis".They incorporate the remarks made by Bridget Realmuto LaPerla, State Street in that regard:“the lenders’ voice is part of their stewardship efforts: [truly] long-term investors think multigenerationally, which aligns well with key ESG characteristics. These shifting dynamics between the security lenders and the borrowers are key" [to understanding the future of finance]Dr Domenico Mignacca, Executive Director, Qatar Investment Authority (QIA), shares the preliminary findings of his ongoing research work on “single stock vs equally weighted (EW) and EW leveraged portfolios”, building in part on earlier research conducted with Fabozzi et al. Finally, the Hon. Nick Sherry argues that the ‘Australian Pension Miracle’ can be explained simply by three factors: “smart diversification across asset classes and geographies, higher-than-average exposure to private equity, venture capital and infrastructure investments, and the legal-political autonomy of pension board members (trustees).” The recently published Global Pension Assets study conducted by institutional investment consultants Willis Towers Watson seemed to echo the Hon. Nick Sherry’s assessment: “Australia has the world’s most successful pension system.”