Asset owners have expressed major concerns about the concentration risk in the US but believe the opportunity cost of not investing is large enough to justify maintaining their allocations, according to the recent Morningstar Asset Owner Perspective survey.
The survey is drawn from interviews with 25 of the largest institutional asset owners from North America, Europe and Asia Pacific, to identify trends and issues in the industry.
Concentration risk was a key topic in the report, with asset owners pointing to the concentration of global indices around a handful of large tech companies with growing capital expenditure.
A UK pension fund said: “There are questions about whether these firms have invested too much capital, and whether the returns from that will actually materialise.”
However, asset owners have remained invested in the US due to the underlying fundamentals and potential returns on equity, the report found
A New Zealand Pension fund manager said, “For now, we are still betting on US growth continuing.
“Yes, I think if you ignore it, your opportunity cost becomes enormous, especially if you’re an index manager, because we don’t stock pick.”
However, some asset owners expressed concerns about what they saw as the rollback of shareholder rights in the region, which could make it more difficult to implement investment plans.
“We need data but also intelligent interpretation of that data, and those are massive, massive challenges, and made harder by there being an active resistance in the US, at least, to providing the data that should be available,” one US pension plan said.
Because of concerns around US concentration, asset owners were keen to build more resilient portfolios, Morningstar found.
They have achieved this through greater diversification across asset classes. Private markets (equity and credit) emerged as an area of interest, while infrastructure was increasingly popular as a hedge against inflation.
“What works in a world of greater divergence and volatility? Diversification,” one Australian Superannuation fund commented.
The report also drew attention to asset owners’ efforts to implement AI into their own workflows.
See also: Mercer finds AI now used by majority of asset managers in investment process
“AOs [asset owners] are using AI in tactical ways, experimenting with new technology platforms to scale their work, gain new efficiencies and go deeper in their analysis.
“Interviewees stopped short, however, of fully embracing AI as a strategic partner, questioning the practicality and even the ethics of outsourcing investment decisions or the determination of long-term investment policy to AI,” the Morningstar team noted.
For example, one asset manager described themselves as “lagging” on their AI ambitions, while another warned it was too early to implement it into the decision-making process.
Improving data on sustainable investing remained another key theme. “One of the big challenges with ESG has been, it’s been very hard to get metrics and data,” one Australian fund admitted.
Because all providers have their own methodologies and metrics, it’s been difficult to define what success looks like, asset owners said.
“So, I think what we would like to see is we would like to see providers come together and develop an industry-wide standard of measurement,” the Australian asset owner said.
The report also noted asset owners felt the current retreat from sustainability and climate concerns is a temporary phenomenon.
“I think what we see is that many US companies, banks and asset managers don’t publish climate targets anymore.
“That doesn’t necessarily mean that they have retreated from doing anything about it,” a Netherlands pension fund concluded.
