David Hunt on Three Major Investment Themes to Watch in 2024DavidHuntonThreeMajorInvestmentThemestoWatchin2024

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  >> At the end of the year, it's become tradition for investment firms to come out with their predictions for the next year. And you'll be pleased to know that that's absolutely not my intention today. What I thought I would do is instead talk about some of the big themes that I'm seeing in my conversations with CIOs around the world and then tease out from that some of the questions and some of the implications for investors in a world that's rapidly changing. The first theme that I want to focus on is the new meaning of resiliency for a portfolio. You know, historically, many portfolios were constructed with careful correlation matrices that were built based on the cycle of a business investment. And yet, as we've looked over the last five or six years, most of the major risks, whether or not it's been the pandemic, whether or not it's been two wars that were not predicted at all, whether or not it's been shocks from the prices of things like oil or inflation broadly, all of the risks that we've been seeing actually are much more idiosyncratic. And at least it's our belief that these idiosyncratic risks, which can come from a wide variety of sources, including cyber risks, trade risks, some of the geo-monetary risks that we've been seeing, actually are going to be more important than many of these business cycle risks that have traditionally been seen. So the question for CIOs is then, what does that mean for resiliency? How do we actually build a portfolio that is resilient to many more of these idiosyncratic risks? And I'll just give you two factors, because we've been doing a lot of work on this for CIOs around the world. One of them is a very much more important role for liquidity. In order to withstand a lot of these and also to take advantage of opportunities that emerge on the other side of some of this volatility, it's very important that we have the necessary liquidity to get to the other side of it. And that is quite a different definition than we've historically had. In fact, many of you will see in some of the pieces that we've written on, you know, should large schemes actually have a chief liquidity officer who really focuses on a lot of these themes? The second factor that I would point to is diversification. Diversification again has been traditionally defined around some of these business cycle risks. But in a world which has much more political and geo-economic risk to it, maybe that actually fundamentally changes how you think about the diversification in emerging markets, the diversification across industries, and certainly the wide-ranging diversification across regions around the world. The second major theme that I hear from CIOs around the world is how they are changing their portfolio to account for the fact that we are likely to have higher interest rates and higher inflation around the developed world for the foreseeable future. We certainly have been through a period where we've had very low rates for quite a long time, negative returns on many government securities around the world, and that led to an incredible hunt for yield, right across the risk spectrum. But that world is now really changing. If you buy our argument that actually there are real reasons why we will have higher both nominal and real interest rates going forward and also a higher level of inflation, then that really does change asset allocation, portfolio construction, and liquidity. Now, obviously, for many big schemes, higher interest rates also changes their liabilities. And there's been a lot of work that CIOs have done around the world to look and estimate what those are, but maybe less work on the asset side. On the asset side, though, we are going to see certainly a shift in a very important way back to credit, we believe. And fixed income in general will take more of a front seat in its historic role in playing a critical way of both generating income, and now we see a role for generating real asset appreciation in a portfolio constructed broadly across public and private securities. And the third major theme that I hear right around the world is this fundamental look at the role of private alternatives in a portfolio. Now, for much of the last 20 years, there has been an increasing allocation to privates, much of that dominated by private equity. But what's happened really since the GFC is that banks have been pulling more and more out of the funding of many of the developed markets economies and leaving that private credit funding to investors, both GPs and LPs. And we actually think that that is a trend that's got a long way to run and we believe that CIOs will increasingly find that there are new asset classes within private credit that will be very attractive, from both a risk and a diversification point of view. And that as banks continue to have more and more constraints around how much they can allocate that private investors are going to have an opportunity to significantly expand the range of private credit strategies that they employ. And the implications of that for portfolio construction and for liquidity are profound and I think are only now just being understood by CIOs around the world. So if you take these three trends together, we as a fiduciary manager that has a long-term perspective on investing across public and private markets, we do believe that, taken together, these indicate fairly substantial changes in the way large sophisticated asset managers will be looking at their portfolios. The rise of the need for real liquidity, the desire for broader diversification for building resiliency, the importance of the higher rates for longer, and this movement now toward a broader range of private alternative strategies all have important implications for CIOs as they think about the next generation of resiliency in their portfolio. So it's going to be an exciting time as we all work through together how to implement these changes and build for safer retirement outcomes for all. Thank you.