Retooling investors for an age of uncertainty

Hendrik du Toit
— 1 minute read

As global markets move in to a new era, investors need to rethink the way they allocate capital and seek growth, writes Investec's Hendrik du Toit.

The twenty-first century can be a prosperous era. We have the potential to harness the power of our multipolar, multicultural and interconnected world to generate long-term economic and productivity growth based on environmentally sustainable infrastructure and communications technologies.

The world made some amazingly positive steps towards this goal in 2015. The United Nations Addis Ababa Action Agenda, including the 17 Sustainable Development Goals, and the Paris Climate Agreement have created a universally accepted global policy framework for a new economic paradigm.

2015 was also the year in which the sustainability agenda went mainstream, with many major institutions adopting stronger environmental, social and governance criteria.

But for all the good intentions, achieving these aims still seems a long way off. Seven years after the financial crisis, the global economy has not yet fully recovered.

Market actors and regulators have yet to adapt to the new risks and uncertainties that arise from the very interconnectivity and globalisation that have the potential to reinvigorate the global economy. Consequently, markets are volatile, global economic growth is weak and productivity is going nowhere.

So how can we, as owners and allocators of capital, help break this cycle of volatility and stagnation?

We need to take a long, hard look at the strategies and assets in which we invest and the way we construct portfolios. We need to generate resilient, sustainable long-term returns. We need to protect the savings of the pensioners of today and tomorrow, so they have confidence that they will have a dignified old age.

We need to preserve and grow wealth for future generations. We need to lengthen our investment horizons beyond the next quarter and find innovative opportunities that will drive future economic growth and productivity.

Many of the tools we require to build innovative, resilient and genuinely long-term portfolios are still to be developed, but some of the foundations already exist. The beginning of the journey is more about how we conceptualise their application.

Rethinking Risk

The age of the “risk-free asset” is over. As uncertainty abounds, asset allocators must embrace risk and seek appropriate rewards for doing so. In many quarters, particularly in the pensions industry, risk is a dirty word and the aim is to generate above-market returns by taking on as little risk as possible.

Before the financial crisis, when US Treasury bills were yielding 5 per cent or more annually, institutions could easily meet their mandated returns by taking little risk, but we no longer live in that world.

Interest rates have been at historic lows for the best part of a decade and now several major central banks have adopted negative interest rates, an unthought-of situation until recently.

Global economic conditions are unlikely to be conducive to rate hikes any time soon. Institutions will, therefore, have to take on more risk to meet their return objectives, however it’s not just a question of more risk. To build a portfolio that meets its stakeholders’ requirements, it’s a question of which and how.

Amid increasingly uncertain and complex global capital markets, all institutions should think about diversifying the risks to which they are exposed both at the asset-allocation level – holding an appropriate combination of assets from across the spectrum – and at the asset-class level to prevent their entire portfolio declining in value simultaneously.

Not all equities are exposed to the same risks, and stocks in so-called quality companies, for example, demonstrate lower volatility and higher yield than many others.

But even beneath that analysis lies the potential to harness alternative risk premia: the systematic risk-based determinants of portfolio returns.

Successfully identifying these factors and allocating to take account of them can enhance a portfolio’s diversification and resilience by harnessing uncorrelated or less-correlated sources of returns.

By understanding the risks to which they are best suited, institutions can allocate appropriately, to garner healthy returns and put money to work to spur economic growth and productivity.  


The challenge for all investors is persuading stakeholders that the industry has to change.

If we continue to allocate in the same way, we will fail the ultimate owners of our capital: our policyholders or citizens. Not only will we fail to provide for their needs, but this period of uncertainty, volatility, of low growth and productivity will be prolonged.

Such a move requires our boards and trustees to take a longer-term view of their stewardship of the capital and think about what that means for their portfolio strategy.

If all parties along the investment value chain can engage and pull in the same direction, it becomes easier to generate long-term value for all concerned. The challenge is knowing what that engagement looks like, how it complies with regulatory requirements, and how to structure the reporting process.

As part of helping investors think about longer-term outcomes of their investments, the Business and Sustainable Development Commission, founded by Unilever chief executive Paul Polman and former UN Secretary General Lord Mark Malloch-Brown, has been formed to help businesses around the world understand the role they can play in creating this new reality.

As part of this, it aims to make progress towards scoping out the instruments that can finance a new global economy based on resource-saving technology, carbon-neutral infrastructure, IT and communications.

By helping investors to understand how they can put their capital to work to generate long-term returns for the benefit of future generations, this new paradigm could drive growth, employment and complement the skills and interests of people across the world.

In this context, the financial services industry can take up its role in shaping the debate around how business can take practical, commercially viable steps to help achieve the sustainable development goals.

Hendrik du Toit is the chief executive of Investec Asset Management and the commissioner of the Business & Sustainable Development Commission.


Retooling investors for an age of uncertainty
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