The progression of bonds and frontier markets over the long term will be top of mind for institutional investors in the coming year, according to Andrew Forsyth, senior vice-president of institutional investment services at Franklin Templeton.
Fixed income may be in the good graces of institutional investors again as higher bond yields lead the way for the asset class. However, while bonds could make a comeback in terms of the role they play in portfolio structures, he’s seeing a difference in how plan sponsors are approaching the investment category.
“It’s slightly different than what we’ve seen in the past because we are seeing more interest towards diversification both across the credit spectrum as well as beyond domestic [fixed income] and into the global space.”
Read: 53% of world’s largest pension funds say recession is top concern: survey
When it comes to bond allocations, institutional investors have traditionally gravitated to more developed markets However, as they’ve become more educated on advances within the global bond space, he’s noticing less reluctance to explore this market.
After an eventful 2023 on the global stage, there’s potential for emerging markets to play a bigger role for plan sponsors, despite ongoing geopolitical risk. The appeal of frontier markets over the long-term is still being impacted by current geopolitical turmoil, but Forsyth says there’s growing recognition that emerging markets may hold more opportunities for growth in equities and fixed income compared to developed markets. However, investments in frontier markets hinges on good due diligence, underscoring the need to access reliable data that can pinpoint risk-adjusted assets.
“If you look at sort of the returns that we see potentially over the next 10 years versus what’s been around for the last sort of 20 years, I think the emerging market equity world is starting to look a lot more attractive.”
Read: 67% of asset owners say ESG factors increasingly material to investment policy: survey
There’s also growing opportunities for smaller investment organizations to find opportunities in an arena that’s previously been closed off to them, he says, citing the emergence of novel liquid private equity structures. These structures have typically excluded smaller plans since usually only the largest plans can afford to invest directly or alongside another partner.
“The diversification benefits and the potential rewards of investing in these private markets can now be accessible to smaller plans. That’s just going to be broadly better for the overall community at large.”
In terms of environmental, social and governance investments, Forsyth thinks the next steps could be related to impact metrics for investment assets. “We’re certainly starting to get a lot of questions about impact, mostly related to carbon, although the social element is sort of peaking out as well.”
However, while trends from the European investment market are taking hold in Canada with a desire to evolve ESG beyond its current form, he says it’s unlikely that Canadian institutional investors will adopt sustainability or impact metrics in the near future.
Read: Cybersecurity concerns spark U.S. executive order blocking investments in Chinese tech