OKLAHOMA CITY: Bondification. It is what passes for the latest big idea in investment.
That is a key finding in the latest round of research into the thinking of the world’s senior fund managers. Six years ago, it was safe to predict that the global financial crisis would lead to profound changes in the way big institutions manage their money. That has come to pass.
So we can see from Citibank’s sixth Annual Industry Evolution Report, which involved interviewing 100 managers responsible for some $30 trillion in assets, and the annual report produced for Principal Global Investors by Create-Research, which surveyed some 705 different investment managers worldwide, worth some $26.8 trillion. What is less clear is a new model to replace the old certainties.
Both surveys make clear that the system managers used to allocate assets and manage risk failed comprehensively during the 2008 crisis and has been all but abandoned.
One key facet of the old model was to compare asset returns to a “risk-free rate”, derived from the yield on long-term government bonds. This no longer works as nobody really regards bonds, at their current valuations, as in any way “risk-free”. As one manager said, “as long as bonds lack a sensible anchor point at all maturities, they are an unsuitable benchmark”.
Second, the pre-crisis model was based on spreading risk by allocating between asset classes. The problem was that very different asset classes, such as commodities or emerging market equities, might be vulnerable to the same risks and fall at the same time — as happened in 2008. Therefore, both reports find fresh attempts to allocate money according to risks, regardless of asset classes…