Valuation extremes to return to cyclical norms
Global Investment Insights
with Greg Cooper, Non-Executive Director, NSW TCorp; Perpetual Limited; Colonial First State
Greg currently holds directorship positions across a number of different organisations, all facing very different challenges and opportunities:
NSW TCorp is well advanced in its move from a more traditional strategic asset allocation based approach to a total portfolio approach for achieving client objectives. Coincident with this has been the need to significantly increase the internal investment capability – both in terms of portfolio construction and implementation.
Perpetual, among other things, is building out its international and ESG investment capabilities with the acquisition of Barrow Hanley and Trillium – one of the founders of ‘ESG’ investing in the US. Greg holds a strong view that sustainability and broader ESG considerations will become ‘must haves’ from an investment capability perspective.
Colonial First State is in the midst of evolving its business with a new ownership structure and an evolving customer model (as are all retail funds) which will ultimately include a more developed investment proposition.
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Sustainability and broader ESG considerations will become ‘must haves’ from an investment capability perspective.
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More broadly, the market is seeing the increasing size of asset pools enabling asset owner organisations to build out their investment capabilities and, as a result, have a better understanding and control over how they go about the process of understanding client objectives and building portfolios to better meet these objectives.
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Increasing size of asset pools is enabling asset owner organisations to build out their investment capabilities and have a better understanding of client objectives and control over building portfolios to meet these objectives.
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This involves a much greater use of “insourced” investment capability and the operational aspects of that capability. However, more importantly, it gives them a significantly greater ability to build portfolios that are more tailored to client objectives rather than following more standardised investment policies and approaches with component outsourcing.
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Not everything will be internalised, but asset owners will take more ownership of the overall portfolio construction component relative to client objectives.
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This is not to say that everything will be internalised, however asset owners will increasingly take more ownership of the overall portfolio construction component relative to client objectives which drives the bulk of the risk and return outcome for clients, rather than relying on more “standard” industry models of baseline strategic asset allocations with a separate implementation decision around component asset classes.
A wholistic view of the client objective and the available assets to meet this objective is a much more exciting construct and should lead to better investment outcomes for clients.
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A wholistic view of the client objective and the available assets to meet this objective is a much more exciting construct and should lead to better investment outcomes for clients.
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The biggest challenge capital allocators face from an investment perspective is the material impact geopolitics and central bank policies are having on investment markets at the moment.
Since the GFC the move by central banks around the world to implement significant QE policies and the subsequent reduction in interest rates, including negative rates, has had a major impact on investment fundamentals. Similarly, the changing dynamics of the geopolitical landscape is increasing the ‘risk’ of some investments.
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The move by central banks around the world to implement significant QE policies and the subsequent reduction in interest rates, including negative rates, has had a major impact on investment fundamentals.
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“In the superannuation landscape, I think the increasing push by the regulators to ‘measure’ and benchmark activities for comparability will I lead to less dispersion in investment over time (not a good thing) and less innovation in the industry from an investment perspective, as “what gets measured gets managed”. Funds will increasingly look to minimise the business and regulatory risk of their activities. While we understand where regulators are going and what they are trying to achieve, they need to be careful that they do not define the industry investment model by way of regulation”, Greg remarked.
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Increasing push by regulators to measure and benchmark activities for comparability will likely lead to less dispersion in investment over time – not a good thing.
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Looking ahead, Greg sees equities as likely to provide the greatest returns (albeit with significant risk) in the near term, given the impact of central bank policies.
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Opportunities are likely to come in areas where the disruptive impacts from technology, geopolitics, and sustainability are greatest.
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Within this, opportunities are likely to come in areas where the disruptive impacts from technology, geopolitics, and sustainability are greatest (provided one is on the right side of that distribution). This is probably likely to be best realised by direct ownership of assets, as these disruptors are unlikely to be listed entities at the moment or where significant long term investments need to be made and listed markets are generally not good at understanding or rewarding those.
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Disruptors are unlikely to be listed entities, so opportunities are likely best realised through direct ownership of assets.
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That said, “I have no doubt that some of the valuation extremes being witnessed in the market at the moment will ultimately return to their cyclical norms. The old “in the short term the market is a voting machine but in the long term it is a weighing machine” will eventually kick in – central banks and government distortions can move things out of kilter for a time, but not forever”, Greg stated.
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I have no doubt that some of the valuation extremes being witnessed in the market at the moment will ultimately return to their cyclical norms.
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Greg left us with some personal reflections that may serve as advice to others. “Just because everyone is doing something, does not mean it is the right thing to do. Standing away from the crowd, while difficult, is just as important in a personal context as it is in an investment context, he concluded.
Disclaimer
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