Speaking at a UBS event in Sydney yesterday, UBS Global Asset Management head of investor strategy Tracey McNaughton said the factors responsible for driving growth in the period from 1986 to 2007, such as the looser regulation of financial markets and the participation of the baby boomer generation in the workforce, are now in reverse.
“As the baby boomers progress as a cohort, they change the shape of society, the economy, and the political landscape,” said Ms McNaughton.
The exit of the baby boomers from the workforce will see government tax revenues decline and dependency ratios rise, she said.
“The baby boomers will be selling out of their assets, putting downward pressure on risk assets and financial returns,” Ms McNaughton said.
“Not only is the expenditure side rising but the revenue side is falling; the existing cohort that is working will face increased income taxes, so that’s going to impact the growth rate of the economy.”
Ms McNaughton disagrees with the notion that we are currently in a low-volatility environment.
“If you simply look at the daily returns in the equity market, the rate at which the returns move by plus or minus one per cent has actually increased significantly in the last couple of years,” she said.
As a result of these changes, practitioners in the field are going to have to rethink their approach to asset management, according to Ms McNaughton.
The beliefs that bonds are a risk-free asset, that equity investments will not lose money over a decade-long period and that liquidity can be taken for granted are “now becoming shattered”.
“Risk management is now far more crucial than what it was 20 years ago,” she said.
“Investors are now asking more and more questions about risk systems, scenario testing and forward-looking measures.”
Ms McNaughton added that a ‘set and forget’ approach to equities is no longer adequate and fund managers will need to think more carefully about how they deploy their fee budget.
