Home / Analysis / Global institutional investors fret ‘misguided’ interference

Big investors want to build resilience into their portfolio and “get on with their job” of generating returns for members and clients even as policy shifts, short-termism and government interventions make that job much harder.

Geopolitical unrest and government interference are weighing heavily on the minds of big investors, according to a bfinance survey of 311 senior investment personnel from institutions responsible for more than US$7 trillion in assets.

The bursting of the AI bubble was cited by investors in Japan and Australia as the “greatest threat” to achieving their investment objectives, while others are worried about a liquidity crisis, with a respondent from one Canadian pension fund warning that large asset allocators that are heavily invested in private markets “will have lots of difficulty to rebalance their portfolio” in an equity market shortfall”.

But for many it’s problems arising well outside markets that they have the most to worry about – for example, the “misguided political coercive investment guidelines” making life hard for one Swiss-based institutional investor, or the “policy shifts, interference and short-termism” weighing on the mind of a UK pension fund manager.

“It would be great to just be allowed to get on with our jobs,” they told the bfinance survey.

For the institutional investors in the survey, getting on with their jobs now means making potentially sweeping changes to the portfolio in the name of resilience, but opinions differ wildly on how – and why – to do it. Some 23 per cent of institutions want to armour themselves against a “slow/prolonged drawdown in risk assets”, but plenty are worried about a faster moving drawdown, a sudden reduction in liquidity or the failure of traditional bond vs equity diversification.

Resilient against what? The three biggest risks investors saw to their ability to meet their investment objectives were geopolitical unrest/conflict (54 per cent); weak macroeconomic growth (37 per cent); and an equity market correction (22 per cent). But that won’t stop them from piling into thematics like AI and technology (40 per cent see it as a “strong opportunity”) with contrarian/value/counter-cyclical positioning on the backburner (19 per cent).

And that’s despite only 34 per cent of investors predicting that the six largest tech stocks will beat the MSCI World over the next 12 months, with the same number anticipating more diversification in their equity portfolio across style (22 per cent), size (16 per cent), geography (16 per cent) and stock level (14 per cent).

Meanwhile, nearly half of investors also anticipate an evaporation of the illiquidity premium in private markets assets as more and more “smart money” chases the same or fewer number of opportunities.

“Increased investor demand could suppress the illiquidity premium compared to the last two decades,” said a respondent from a German family office. “The demand for “real assets” will not go away in an economic environment with more inflation pressure from the supply side… Increased demand from investors for private market assets (institutional and in the future also retail), supported by banking disintermediation, and less restrictive regulation (to enable more flows into sustainable investments).”

Institutions are also flocking to the climate transition, with 40 per cent saying it presents a “strong thematic investment opportunity”, a quarter planning on increasing their allocation to impact strategies, and 24 per cent planning on entering into nature/biodiversity-focussed assets.

“We need to improve resilience to long-term climate transition risk,” said one respondent from a Dutch pension fund.”