As an asset allocation strategist, I am used to thinking about long-term strategic asset allocation challenges. Recently, I have been focused on the very long term. This has involved researching expected capital market trends over the next two decades, and how a forward-looking plan might evolve its portfolio and governance structure to prepare. In pursuit of 20-year ideas, I identified four major capital market trends likely to influence the next two decades.
Demographic shifts mean a larger population of retirees relative to workers, which has implications for demand for income- and longevity-oriented strategies, as well as the valuation of assets such as equities and real estate. Demographic shifts may also influence equity valuations due to reduced growth in productivity, which could lead to slower earnings growth.
Speed and volatility mean global markets will be subject to greater swings, as some of the traditional market makers or other stabilizers play a smaller role in markets. If the last two decades are any guide, we are also in for a slew of new financial products, tools and acronyms (on the heels of exchange-traded funds, credit default swaps and commercial mortgage-backed securities, etc.). Investors will have to prepare for more volatile markets by adjusting policies so they don’t overreact to short-term moves, and, perhaps, by seeking more opportunistic investments.
Environmental, social and governance (ESG) investing has also been on the rise, possibly driven by millennial investors (those born between 1980–2000), who seem to favor investments that—beyond maximizing return relative to risk—also seek to have a positive impact on the environment and society. Asset owners can adapt to ESG by integrating environmental, social and governance factors as part of their portfolio or risk management process, alongside more traditional measures. They can also seek to make an impact through targeted investments seeking environmental, social or governance benefits alongside attractive returns.
China’s capital markets are likely to grow and deepen. Over time, the opportunity set in China is expected to converge with that of the U.S., implying a range of opportunities not only in public equities but also in government, corporate and mortgage debt, and a range of private assets. With much of this growth still ahead and current opportunities more limited, investors should think today about an evolving strategy for China-related investments, where seeds planted today can grow over time into full-fledged relationships and partnerships.
The question is, what if the trends outlined above don’t play out as we expect—or are overshadowed by other trends that we can’t imagine today? Is there anything investors can do to prepare?
The answer is yes. Asset owners can build more nimble, flexible organizations that can evolve over time to adapt to new trends and new ideas, whether that is incubating new asset classes and strategies that might grow over time, or making seed investments in emerging companies, technologies or thematic portfolios that have the potential to grow beyond our limited expectations.
Adam Berger is vice-president, asset allocation strategist, Wellington Management Company