More than anything else, pension funds and other institutional investors are concerned about the financial impact of geopolitical conflicts on their returns. To hedge against this risk, funds want to further diversify their portfolios, for example by increasing investments in private assets.
A survey by consultant bfinance among 311 institutional investors across the globe with a combined $7trn in assets under management, including 134 pension funds, showed that as many as 54% of respondents consider geopolitical conflict as a “very significant threat” to achieving their investment objectives over the next three years. Another 37% are “fairly concerned” about geopolitical risk.
Concerns about escalating geopolitical conflict eclipse other threats by a large margin. Some 37% of respondents consider disappointing economic growth as a significant threat to returns. A correction in the stock markets (31%) and inflation (19%) score even lower.
Top threats: Over the next three years, which of the following represent the greatest threats to your institution achieving its most important investment/funding objectives?
“It almost never happens that geopolitical risk tops this kind of poll. We tend to see things that are more directly related to the financial markets topping the list. But we indeed live in special times,” commented bfinance’s Kathryn Saklatvala.
Donald Trump
If the poll had been conducted now, investors’ geopolitical concerns would likely have been even more elevated as the survey was conducted in October, before the election of Donald Trump as US president and before the recent escalation of the war in Ukraine.
“The past few weeks have certainly not been positive in terms of geopolitical risk,” said Saklatvala, who at the same time pointed out that it is difficult to hedge for something as broad as geopolitical risk.
Nevertheless, three-quarters of investors polled want to strengthen the “resilience” of their portfolios, in particular by hedging against a fall in the stock markets.
Tech stocks
In recent years, many (equity) portfolios have become less diverse as a result of the persistent outperformance of technology stocks in particular, a Dutch pension fund surveyed by finance pointed out. Investors are deeply divided on whether that outperformance will continue: 34% of respondents think so, while 28% expect the opposite.
Some 53% of investors also want to invest more in real assets in private markets. This also seems to be a strategy to limit exposure to geopolitical risk. After all, unlike corporate firms, real estate, roads and solar and wind farms are less directly affected by, for example, import tariffs.
Emerging markets, on the other hand, are out of favour as an investment destination: one in five investors plan to reduce investments in emerging market equities. In the Netherlands, for example, the Bpf Bouw and KPN funds recently decided to scale back their emerging market investments.
Impact investing
Impact investing and investments in biodiversity and nature seem to be rapidly entering the mainstream, according to the bfinance survey. More than half of respondents are already doing impact investing or are planning to start doing so. For biodiversity and nature, it’s a third.
But appearances can be deceiving, according to Saklatvala. “In 2022 we conducted a similar poll showing similar outcomes. This means that the investors who were planning to make impact investments have not been putting their money where their mouth is. Indeed, we have seen little interest from customers to start with this.”
According to Saklatvala, this is due to the “market turbulence” of 2022 as a result of rising interest rates and inflation, and the disappointing returns of many ESG investments since then. “Only in the past three months have we seen a slight uptick in interest in impact investing,” she noted.
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