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We cannot say it is “breaking news”, nor a “tipping point”, but the obvious should still be stated: Pension funds are facing an everlasting challenging environment. And while they have adapted, in the past years, in order to mitigate the impact of such a new world, new challenges have arisen, as solutions are progressively implemented and markets are evolving.
Indeed, for more than 5 years now, investors have had to handle a more complex investment framework. From their weakened funding ratio, they had to face an environment within which rates were decreasing and regulatory pressures increasing. Low rates pushed pension funds to go beyond traditional asset classes and enter into new territories as a mean to harvest yield. In particular, investors had to compensate by on-boarding non-domestic, illiquid and more sophisticated assets. On the Liability risk side, many investors have been caught up in the dilemma to lock in their losses by matching their liability duration or to keep on waiting for interest rate to rise, as “unrealized” losses are not losses until they are “realized”. On the “growth” portfolio side, the ideological debate between active and passive management takes on a new significance and markets participants have reacted with new innovations and increasing interests for a “midfield” approach like “smart beta” strategies, and more recently “factor investing”.
If much of the described trends are expected to remain, it should be noted that following this “recovery” period, market participants are seeing the first signs of a new momentum made of new breadth, but also new uncertainties. The emergence of reinforced long-term investment goals, and rising awareness of investment’s utility are part of this new momentum. Long-term investment incentives, Sustainable Finance through ESG driven investment and green finance, as well as investment to support the Real economy are gaining more and more attraction. With these new themes, come others like Disruption or de-globalisation, which are bringing uncertainty until it becomes clearer if it has to be put on the risk side or the opportunity side. Overall, pension funds are keeping track off all significant initiatives they’ve put in place and have now to integrate these new considerations.
As the set of topics to be handled is broad and in continuous evolution, Amundi is happy to issue this new and focused Pension Fund Letter aiming to share our research and insights on these themes. In this first issue, we are questioning the asset allocation and portfolio construction approach. How to build and evaluate a portfolio made of liquid and illiquid assets? Is the liquidity feature the relevant criteria to consider when building portfolio? What about “Factor investing”? How to use these solutions when considering portfolio construction process? You’ll find in this edition, the answers of our experts sharing their insights. In addition, a summary of the Create Report 2017 will summarize how European Pension plans have adapted to the market environment this year and what they expect to do in 2017. For any further study on a subject of interest, please remember that our research and management teams remain at your disposal for any further information.
To find out more, download the full letter
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