Brief: Covid-19 is predicted to cause a sea-change for pension fund investing, mainly in the area of private markets and ESG. Schemes are expected to seek private markets for greater portfolio resilience, and invest in ESG now that Covid-19 has made more companies realise they “need a social licence to operate”. Meanwhile, global equities will be sought as pension funds try to plug funding gaps. Portfolio resilience is the chief prize for schemes, with “anti-fragility” the key concern, according to Professor Amin Rajan (pictured), whose latest research has just been published. Three quarters of schemes surveyed said they will target private markets to achieve custom-built resilience, whereas “high-quality cash flow compounders” among global equities will top the asset allocation choice for 76% of respondents looking to build antifragility into their portfolios. The research was published by Professor Rajan’s Create-Research consultancy and asset manager Amundi. It has 158 respondents from pension funds in 17 markets managing nearly €2 trillion in assets.
Brief : Dealmakers are on track to end 2020 with a flourish, having recovered much of the ground lost to the coronavirus pandemic earlier in the year. Companies have announced $760 billion of acquisitions so far in the fourth quarter, the highest for this point in the period since 2016, according to data compiled by Bloomberg. November has been the busiest month of the year so far by number of deals, the data show. The tally got a boost Monday with financial data giant S&P Global Inc.’s takeover of IHS Markit Ltd. for about $39 billion in stock, the year’s second-biggest transaction. The latest series of megadeals, added to the record third-quarter haul of $993 billion, is helping volumes recover after the Covid-19 crisis triggered a steep decline in the first half of the year. The value of M&A announced this year is now down just 13%, compared with the 42% decline through the end of June. Most of this year’s biggest deals have come in the past few months, including Advanced Micro Devices Inc.’s $35 billion takeover of chipmaker Xilinx Inc. agreed in October. Other major transactions announced recently include billionaire Li Ka-shing’s sale of his European wireless towers to Cellnex Telecom SA for about 10 billion euros ($12 billion) and the 7.2 billion-pound ($9.6 billion) purchase of blue-chip British insurer RSA Insurance Group Plc.
Brief: Substantive Research, a research discovery and research spend analytics provider for the buy-side, has published a survey into how asset managers have changed their approach to research payments during Covid-19. The findings indicate that the value asset managers place on one-to-one interactions with analysts has fallen by 47 per cent since the pandemic began and all physical meetings became virtual. Group meetings fared only slightly better, with the rates paid for virtual as opposed to face-to-face meetings dropping by 35 per cent. This is despite the appetite for research increasing and analyst engagement rising over the same period of time. The drop in value applies to asset managers that agree annual all-in prices at the beginning of the year, as well as those that value and pay for research after consumption. The survey also indicates that from the start of the Covid-19 crisis, 40 per cent of asset management firms who agreed a total research payment in 2020 have since recalculated and reduced their payments to providers in light of market uncertainty and structural changes in research consumption. Annual research budgets can vary greatly depending on the size of the firm, from USD1 million-USD50 million-plus for the largest asset managers. Analyst interactions make up 50-70 per cent of research budgets with one-to-one meetings as the main driver of those payments.
Brief: The U.S. economy seems to be holding up despite a surge in Covid-19 cases and hospitalizations, clouding the case for more monetary stimulus, Federal Reserve Bank of Richmond President Thomas Barkin said. ‘’It’s hard to find a huge drop in the real-time data,” Barkin told reporters Monday in a press briefing before a University of South Carolina virtual speech. “I’m thinking about credit-card spending which I get to see every week. It really hasn’t taken a step back yet.” The Fed’s monthly asset purchases of $120 billion already are providing a pretty strong stimulus to the economy, in addition to near-zero interest rates, Barkin said. The Federal Open Market Committee is considering changes to its asset program, including new guidance, the minutes of its last meeting showed. “I’m intrigued by what the Bank of Canada has done in terms of duration extension,” Barkin said. “I think that is an interesting technique if we decide the economy needs some more stimulus.” Last month the Bank of Canada made a technical adjustment to its bond purchase program, scaling back the buying of government bonds while shifting purchases to longer-term securities. Yet with long-term U.S. Treasury yields below 1%, a move to push down rates further might have little effect, he said.
Brief: The ICE BofA MOVE Index, which tracks expectations of volatility in Treasuries, is again languishing near all-time lows after a spike in March was quelled by U.S. Federal Reserve intervention. But a handful of fund managers, and some major banks, warn of the risk of a spike in inflation next year that could spur losses for bond funds and more volatility before the Fed steps back in, or eventually even change the central bank’s stance. Nancy Davis, who manages the Quadratic Interest Rate Volatility and Inflation Hedge ETF, said she has seen a jump in interest in recent weeks from investors worried about the impact of rebound in some of the consumer and asset prices quashed by this year’s crisis. She argues that while stock markets have accounted for COVID-19 vaccines spurring a swift recovery in 2021, debt market indicators of inflation have not budged, leaving bondholders exposed if headline price growth moves. “Equities already seem to be pricing this in, but the rates market hasn’t,” Davis told the Reuters Global Markets Forum (GMF) last week. “In the U.S., we are likely to get fiscal stimulus from the new administration combined with the loose monetary policy that could push inflation higher, it is probably an underpriced risk at this point,” she added.
Brief: With the global economy dogged by so much uncertainty, pension investors find themselves on a journey into the unknown and now prize portfolio resilience above all else, according to a new report published today by CREATE-Research and the largest European asset manager, Amundi. The report surveyed 158 respondents from 17 pension markets across public and private sectors, collectively managing EUR1.96 trillion of assets. It aims to shed light on how pension plans worldwide are responding as the world economy struggles to recover from what is the economic equivalent of a massive cardiac arrest. The extraordinary policy response by central banks and their governments was timely and vital. But it has also inflicted toxic side effects on pension solvency via ballooning liabilities and plunging incomes from zero-bound interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide. According to 85 per cent of respondents, financial markets will have a W- shaped or an accordion-shaped recovery: both are highly volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent). Professor Amin Rajan of CREATE-Research, who led the project, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to Pension plans.”