In the social media age, it’s easier than ever to lose perspective on events and even institutional investors are susceptible to overreaction amid the avalanche of news and speculation that surrounds the second Trump administration, tensions in the Middle East and shifting market dynamics.

But Nick Chamie, chief strategist and senior managing director of total portfolio and capital markets at the Investment Management Corp. of Ontario, is doing his best not to fall into the recency-bias trap. “We always feel that what we’re going through now is way worse than whatever we went through five, 10, 20 years ago, but I don’t know that that’s the case. We went through 9/11, we went through the [2008/09 financial crisis], we went through COVID, we went through the tech wreck — we’ve been through a lot every few years and I try to remind myself that this is not really any different.

Read: 2022 Top 40 Money Managers Report: Geopolitics roaring back into focus for institutional investors

“It just means that investors need to be agile, they need to be nimble, they need to be willing to adjust to the new environment and try to avoid becoming rigid in their approach.”

After filtering out the noise, Kristina Hooper, chief global market strategist at Invesco Ltd., sees plenty of reasons for optimism, thanks to a strong set of economic fundamentals. At the end of 2024, her firm was projecting that all of the major economies of the world would avoid a significant downturn in 2025, with slow growth in the early part of the year set to accelerate as the months progress.

“It’s a very supportive environment for many different asset classes, largely driven by central bank policies, with so many of them around the world in the process of easing monetary policy, which is a real positive.”

Inflation or stagflation

After hitting peaks not seen in decades coming out of the coronavirus pandemic, inflation has cooled considerably in many jurisdictions — particularly in Canada, where the consumer price index hasn’t exceeded the bounds of the Bank of Canada’s one-to-three per cent target range for more than a year.

By the numbers

• 1.6%-2.9% — The range of Canada’s consumer price index inflation rate on a month-by-month basis over the course of 2024, entirely within the Bank of Canada’s target range of 1-3%

• 2.9% — Canada’s projected real GDP growth for 2025 — the highest for any G7 nation — according to a 2024 report by the International Monetary Fund

• 51% — Proportion of Canadian institutional investors planning to increase their private debt allocations in the next year, according to a 2024 survey by Schroders

• 70% — Projected proportion of federally regulated financial institutions expected to make use of AI in 2026, up from 50% in 2023 and 30% in 2019, according to the OSFI

Still, at the OPSEU Pension Trust, James Davis’ own long-term thinking prevents him from completely moving on from worries about a return to higher rates. “I don’t think the risk has gone away,” says the pension fund’s chief investment officer.

Read: 2023 GIC coverage: How OPTrust is building resilient portfolios with help of external managers

Even worse would be a re-emergence of stagflation — that nasty combination of higher prices and slow economic growth last seen in the 1970s in the wake of the oil crisis. “Our dynamic approach, to the extent that we can, allows us to mitigate inflation risk wherever possible, but it’s really hard to mitigate stagflation,” says Davis.

“I don’t see it, honestly, in the next year or two, but I am mindful of some of the policies we might see south of the border,” he added in late 2024, referring to President Donald Trump’s then threat to impose tariffs on goods from Canada and Mexico, among other nations. [On. Feb. 10, the U.S. slapped 25 per cent tariffs on Canadian steel and aluminum imports.]

Lori Hall-Kimm, head of the global private equity team at the Healthcare of Ontario Pension Plan, is also wary of the potentially inflationary pressure that could be exerted by a wave of fresh U.S. tariffs. But on the flip side of the Trump coin, she says the decisiveness of his election victory has brought a degree of certainty to those in the financial sector that could prove deal-friendly in the short term.

Read: Financial markets resilient in wake of Trump tariffs threat, Trudeau resignation: expert

That’s particularly true in Hall-Kimm’s own area of specialty, where she notes transaction volumes have been “quite depressed” for a sustained period of time. “The markets have responded very favourably and I think most people believe and expect that Trump’s policies will be favourable to the investment and business environment. That gives me a bit more optimism around the return to a more normalized IPO market and a more normalized M&A environment.”

Keeping things private

Despite enduring a recent period of reduced liquidity and tighter distributions, Hall-Kimm is hoping for a rebound in the private equity market this year.

“Overall, the economy has continued to perform, employment has been strong and, with all of that, I do think 2025 should still be a good year for many of the mid-and upper-mid market companies that we’re looking to invest behind.”

AI making a mark on institutional investors

The soaring share prices of the ‘Magnificent 7’ aren’t the only things catching the eye of institutional investors as the development of artificial intelligence technology continues apace.

The collection of key technology companies — Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — has been credited with driving much of the stock market growth in the last few years, but the promise of tech-assisted productivity gains is also prompting investors to look inwards.

A recent report by the OSFI revealed around half of the organizations it regulates were making use of AI in 2023, up from around 30% in 2019. However, the results of the OSFI survey suggested as many as 70% will have adopted AI in their operations by 2026.

“I’m excited about [AI and machine learning technology], not just for the impact on the overall macroeconomy, but also the potential to build even better tools to help us to do our job better,” says the OPTrust’s James Davis.

Boiled down, he says that much of the activity in the financial sector can be summed up as predictions about the future performance of particular assets and markets. “AI is a wonderful tool to help with that, so it’s something we were early adopters of,” adds Davis, noting the OPTrust has had machine learning technology integrated into its overall risk management process for several years.

In the coming years, the pension fund is working on building an AI model that can incorporate the macro-economic decision-making tools currently used by the human members of its investment team. “That model can look at much more data in a much more non-linear way and, hopefully, identify relationships that we cannot identify.”

The HOOPP’s private market allocation has been ticking up recently, partly thanks to the 2019 launch of its infrastructure business. More recently, the pension fund has also formalized a strategy in venture capital, having previously invested opportunistically in the space. In addition, Hall-Kimm says the organization has set out a dedicated policy allocation in the last year for private credit after stepping in to help fill the gap left when banks retreated from the sector in the wake of the Silicon Valley Bank collapse in March 2023.

Read: HOOPP returns 9.38% for 2023, driven by equities, fixed income

Altogether, private assets now account for around 40 per cent of the HOOPP fund and, while that’s still short of the allocations at some of its Maple 8 peers, Hall-Kimm says it’s in line with expectations considering the relatively younger demographics of its membership. “We don’t have a specific target. As we continue to manage our liquidity and think about the balance of private allocations and our liquidity requirements as a fund, coupled with all the exposures we have in more liquid markets, I think we feel good about where we are at 40 per cent.”

The HOOPP isn’t the only Canadian investment organization making a private market play, according to Schroders’ annual global investor insights survey, published in the fourth quarter of 2024. Of the Canadian institutional investors polled, 51 per cent said they planned to increase their private debt allocation in the next year, with slightly fewer expressing intentions to boost their infrastructure (46 per cent) and private equity (42 per cent) allocations.

Michelle Skelly, head of Canada at Schroders, says it’s no surprise to see this country’s pension plans, in particular, continuing their push into private markets. “A lot of these plans today are fully funded, so going into private markets makes sense because you’re looking at increasing these allocations to diversify the portfolio and differentiate the return profile of the plan.”

Read: Institutional investors increasingly eyeing private assets amid shifting interest rates, diversification push: report

Despite their enthusiasm for private assets in general, Skelly says larger investors are likely to start performing some readjustment within their portfolios, including their real estate holdings. “Everyone knows the Canadian real estate market is tough, especially with everyone having gone through COVID. Broadening out, diversifying from Canadian real estate into European real estate has been the subject of a lot of conversations that I’ve had this year with larger plans.”

Room to manoeuvre

Speaking at the end of last year, Jim Cole, managing director and institutional portfolio manager at PH&N Institutional, said the generally strong financial position of large Canadian pension funds leaves them with plenty of room for variations in their investment strategies, depending on their unique circumstances.

Key takeaways

• Normalizing inflation and interest rates, as well as a solid set of economic fundamentals suggest a soft landing for economies around the world, which will provide a stable backdrop for institutional investors in the coming year.

• The threat of geopolitical instability and an unpredictable tariff war means institutional investors are still wary about a return to higher inflation rates, despite the recent easing of monetary policies at central banks in several jurisdictions.

• Canadian institutional investors are generally still enthusiastic about private assets, with a significant proportion looking to increase their allocations. Still, more mature pension plans may be moving in the opposite direction to boost their liquidity.

“We are in an environment now where investors can earn a real yield on some of their more saleable asset classes, such as fixed income, so I do think there’s an opportunity for investors to be able to right-size the risk profile of their portfolios and still achieve their expected returns in the face of what is still a positive economic environment.”

For pension plans at the mature end of the scale, “we might see some reversal in the asset mix policies that they have embraced from the last four to five years, to go back in to fixed income,” he says. “They may start to focus more on the liquidity profile of their plan as well, which could lead them a little back into public markets versus private markets.”

Michael McKiernan is a freelance writer.