Trustees will have to take on more risk to achieve the returns they have enjoyed in the past decade if Pictet Asset Management’s market predictions prove accurate.
Pictet exceeded its target of achieving a cash-plus-four return in the past 10 years despite taking an equity risk of less than 50%. This was mainly the result of a bond market bull-run, which enabled it to generate equity-type returns from a low risk asset.
“We don’t think that that is repeatable over the next 10 years,” Pictet Asset Management senior investment manager, international multi-asset, Shaniel Ramjee, told portfolio institutional.
“Investors will need to take on much more risk to achieve that sort of return over the next 10 years,” he added.
Since the financial crisis investors have been fearful, buying bonds, credit and defensive equity income funds. But performance here has started to lag, Pictet Asset Management senior investment manager, international multi-asset, Andrew Cole believes. With inflation rising and bond returns falling investors are “getting poorer”.
Having been fearful for the past eight years he predicts that investors will become greedier.
If this change occurs then it could coincide with an equity rally.
Cole sees the prospect of a recovery in earnings this year, which will continue to grow in the coming years thanks to a more broad-based recovery in the global economy. This has seen his team end its search for equities that look like bonds and instead turn its attention to cyclical stocks.
“I need positive real returns so I have got to think about my equity exposure,” Cole said. “If I can only increase it by a bit I’d better make sure that my equities do not look like bonds, so they are exposed to earnings growth rather than safe, secure dividend paying stocks.
“We are optimistic about earnings, so we want to be cyclical,” he added.
If he is right then pension funds may have to work their equity portfolio that much harder to make sure it is geared into earnings and the economy.
“If we think about a longer term change in the pension fund industry, we think that might be the change that occurs,” Ramjee said. “Pension funds need to take a bit more risk in their books rather than just hold on to the interest rate of their bonds and equities.”
Ramjee will be looking at Europe here as part of his plans to alter the portfolio, believing that a fall in political risk could see investors flood into equities.
He puts banks and companies tapping into domestic growth on his wish list. “Should we see some subsiding of political risk in the next month or so, that is where we will put some capital to work,” he added.