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How to incorporate major themes in a portfolio
(Pictured: Carl Hess)
If four of the major themes driving world economic growth play out, super funds will be looking to express that in their asset allocations and portfolio construction. For Towers Watson, this means: reduced home country bias, overweight emerging markets and incorporating thematic views both within and across the equities portfolios.
At its Ideas Exchange conference last week, much of the day was spent on thematic investments – recognizing themes and incorporating them into the portfolio. The consultants said there was no “right” answer with respect to weighting themes. For instance, Carl Hess, Towers Watson’s global head of investment services, said that whether or not low yields were “here to stay” depended on your time horizon. A normalization of short-dated yields was “baked in” over the next decade but long-term yields were priced to remain depressed.
Hess said Towers Watson believed US GDP growth would average 2.2 per cent over the next 10 years. This is 0.5 percentage points below the long-term average. Towers was factoring in a 0.4 per cent favourable contribution from US’s demographics, another 0.4 per cent due to resource scarcity and 0.2 per cent for new technology. But continued deleveraging and intergenerational equity issues would detract 0.4 per cent.
For Australia there was a number of issues, including a likely lower demand for commodities and the impact of other changes within the Chinese economy. The high level of foreign debt ownership and the fact that Australia has not yet deleveraged as much as other countries were other issues.
The four big themes Towers Watson focused on were:
- demographic change, implying an increase in Australian equities and emerging market equities and sectors such as health care
- resource scarcity, also implying an increase in Australian equities and sectors such as energy and materials
- rebalancing throughout the world, especially China, implying a reduction in Australian equities and emerging markets equities
- deleveraging, also implying a reduction in Australian equities and sectors such as financials.
Tim Unger, head of investment strategy in Australia, supported Urwin’s view, saying the fund trustees and management should be willing to look inward and challenge the status quo. “Can you improve your investment beliefs, leadership, culture and decision making? These are things you can control,” he said.
