History Rhymes with the 1970s – or does it?
Degrees of freedom – how much diversification is enough?
Rich Nuzum suggests “There will continue to be opportunity ahead for private markets despite the already strong growth to date”. But “the real debate is about size and in-house versus external. It takes serious expertise to invest in private markets. Are you able to compete with your general partners by doing it in-house? Rich continued to suggest delegates consider all the risks with in-house alternative capabilities.
Harry Liem noted that in Australia and New Zealand most clients are comfortable diversifying into real assets, also given the limited size of local inflation linked bond markets. He also cautioned “diversification should not just be by asset classes, but also by risk factor”.
Position for transition – how can clients best position?
Investors also need to focus on how to deal with the risks posed by the modern crisis of climate change. The transition towards a more sustainable world gives rise to potential investment risks as well as opportunities for investors.
Nick White mentioned various layers of a holistic approach to energy transition. The first layer of energy transition is EV, light transport, and renewable power. The second layer being heavy industry which is harder and needs technological solutions that are more scalable than they are today. The third layer is a broader transition in agriculture. The fourth layer would include biodiversity, water, and pollution. Fundamentally they are inextricably linked, and regulation is coming. Investors need to be aware of the structural risks across their broader portfolio and seek opportunities in strategies that can capitalise on the transition, for instance in the listed markets, with sustainably themed managers.
Rich Nuzum mentioned that emerging markets may be more at risk, as their focus remains on development finance, and basic needs such as infrastructure and education.
And finally, on the topic of AI...
On the other hand, AI will not be able to compete over longer investment time horizons, as it simply lacks the deep understanding to do so. Humans can still think much more out of the box and see the bigger picture.
Thus, while AI has the potential to disrupt, without deep understanding AI is likely to lead to data mining.
History may rhyme, but with AI and new ways of working, today’s investors arguably have greater degrees of freedom to play with than did their 1970s counterparts. Diversification and position for transition will continue to shape investors’ decision making and new opportunities will continue to emerge.