In the wake of the Hayne Royal Commission, industry funds reigned supreme. It has taken more than five years, but the for-profit funds are finally back in the game as the not for profits increasingly struggle to service members nearing or in retirement.
While ESG and diversity have been caught up in the political headwinds in the US, this investment strategy, approaching $US2 trillion in funds under management, is well placed to not only survive but thrive.
Investors on red alert despite inflation being tamed: Atlantic House
The “uncertainty gauge” is currently on red alert and central banks and other components of the traditional financial order will have to work harder if they want investors to keep the faith.
It might have been hard to imagine during the depths of COVID-19, but nearly five years later, central banks have done their job; headline inflation, rising into double digits in most major economies, is now down to sub three per cent in most economies, with even the RBA cutting rates.
But this doesn’t mean people aren’t still feeling its effects.
“The core academic economists will be very satisfied at how it has played out,” says Mark Greenwood, deputy chief investment officer at defined-returns specialist investment manager Atlantic House.
“Whether the electorate and consumers are happy is another question. Inflation… feels a lot higher to people. And there have been post-mortems of the US election where the reason the man on the street wanted a change in administration was because they were experiencing high inflation.”
And it might only be under control for now. De-globalisation and trade wars, more geopolitical risk, higher levels of debt generally and chronic commodity under-investment ahead of what will probably be one of the biggest infrastructure bills in history could all make it worse.
“In terms of goods, when you have free markets, you tend to have competition and goods prices tend to come under control.
“Higher prices result in more supply, and all of that has been why we’ve had this great moderation in the past. If that gets broken by de-globalisation, that’s a big problem.
“In terms of the energy transition, we know that requires a lot more investment in base metals in order to get the infrastructure in place and make that transition, and that’s going to be costly… if anything we’re under-investing, not over-investing.”
Greenwood believes that amid higher fiscal deficits – US debt is now north of 100 per cent of GDP – there must be “a reckoning” and 2025 could be the year that the bond vigilantes ride again.
“When we’re talking about bond vigilantes, we’re talking about institutions such as pension funds, endowments and the like in the US that are prepared to buy bonds.
“Every time there’s a refinancing, a new bond issue, there’s a close tango between the debt management office and the investors where they talk about expectations about the size of the auction. I don’t think we’ll see anything suddenly snap, but like a frog boiled alive we will, at some point, get to the stage where investors say they aren’t prepared to take any more.”
That’s been compounded by the rise of the shadow banking industry, particularly in the US. If US Treasuries were 100 per cent bought by the likes of J.P. Morgan and the Bank of America, the US Government, in the event of a debt crisis, could discover that it needs to increase capital ratios, and more or less require them to buy more.
“The more the shadow banking sector grows – hedge funds, private credit, all these less-regulated institutions over which they have less control – you could argue that risk increases,” says Charlie Parker, managing partner of Albermarle Street Partners, an Atlantic House affiliate.
And there’s evidence on the fringes that retail investors are less trusting of big institutions and traditional asset classes.
“One of the reasons why there’s so much interest in crypto is because there’s lack of faith in governments,” Greenwood says. “It isn’t a bond, and it doesn’t give you a yield. But it certainly has high speculative returns. So, I personally see this interest in crypto as investors stepping back from traditional assets.”
