From the value artificial intelligence (AI) can bring investment management to China’s megatrends, presenters at the 2019 Annual Spring Pension Conference discussed today’s hottest topics and concerns for pensions and the investment industry.

Unlocking the Value of AI

Paolo Salomao, managing director of asset management and pensions at Accenture, kicked off the conference looking to answer the following question: Does AI disrupt the way institutional investors invest and operate? His answer: it doesn’t have to.

Salomao highlighted different stages of the investment cycle where AI can actually enhance the investment process, including managing investment risk, measuring staff happiness, streamlining investment research topics, and identifying early signals in rumours.

Canada, he said, is behind in its use and development of AI in investing versus the Middle East and Asia, where AI use runs rampant for their sovereign funds. Those funds, however, are also less transparent with regard to cost, including AI costs, than Canadian funds are.

Salomao concluded that, although AI is not the panacea for investing, it can unlock value and first-mover advantage holds, as AI brings value due to information asymmetry. Salomao also warned that AI is only as good as the data fuelling it.

Current Macroeconomic Trends

Eric Lascelles, chief economist for RBC, highlighted key current macroeconomic themes and their impact on markets. Of particular interest to the audience was his macro analysis of Canada with a focus on four macro challenges: U.S. deceleration, oil shock, housing slowdown, and competitive edge.

Lascelles believes the Canadian economy is going to experience less credit growth, and of housing credits in particular, which will cool for a while.

On the whole, Lascelles anticipates that long-term headwinds will work against growth in developed countries, which will translate, in turn, into persistent market volatility, moderately cheaper stocks than bonds, flat to slightly higher bond yields, and cautious credit.

Building a Sustainable Finance Framework

A panel discussion on sustainable finance and climate change included four specialists in the field: Stephen Kibsey, vice-president of emerging risks at Caisse de dépôt et placement du Québec; Pieter Wijnhoven, managing director at Ortec Finance Canada; and Barbara Zvan, credit risk & strategy officer at OTPP.

The speakers highlighted initiatives to help take climate change into account as a systemic risk driver in strategic investment decisions, in a world with imperfect knowledge about the future. Of particular interest were the speakers’ insights on Canada in terms of sustainable finance. Currently, the main Canadian indices are overweight carbon at a level that’s consistent with a four- to five-degree warming scenario; to mitigate this outcome, the investment industry would need to construct low carbon indices, such as the climate-adjusted GDP growth index.

Taking this metric into account in Canada, the speakers observed, would have a significant impact in terms of carbon footprint.

China’s Megatrends

Catherine Yeung, investment director for Fidelity International, walked the audience through the most important current Chinese megatrends:

1. unmet demands in China’s healthcare sector and increasing development in innovative drugs;
2. Asian millennials as a powerful source of demand for Chinese brands (which are on track to become the top 10 most popular brands in China); and
3. increasing fixed asset investments such as the subways in Greater China and the green initiatives under the Beautiful China campaign.

Yeung recommended investors to have a more balanced view between old and new China. Old China includes mature industrial companies with centralized leadership, solid balance sheets, improving free cash flow, and attractive dividend yields. New China includes companies with huge growth potential and disruption opportunities.

Scenarios for the USMCA Ratifications

Jeffrey Wright, analyst, U.S. practice, with Eurasia Group, offered the audience a scenario analysis on the potential outcomes of the U.S.–Mexico–Canada Agreement (USMCA). According to Eurasia Group, the agreement has a 60 percent chance of ratification.

Wright suggested that, even while Democrats are hesitant to allow a Trump victory, they’re also scared that Trump might refuse to agree to a deal altogether. The biggest threat to the USMCA is Trump’s trump card: withdrawal (although that’s highly unlikely).

The effect of the USMCA agreement is likely to be minimal, Wright concluded, especially in terms of GDP, with only a 0.2 percent increase forecasted and with impacts on the auto, dairy, and pharmaceutical sectors.

Top Challenges and Opportunities

The conference concluded with a fireside chat that saw four CIOs—François Bourdon, Fiera Capital; James C. Davis, OPTrust; Jean Michel, IMCO; and Marlene Puffer, CN Investment Division—offering their views on navigating portfolios in an increasingly volatile world and changing business landscape.

When asked about the key to success for an effective asset allocation, the panel suggested the age-old adage of having a long-term perspective and building portfolios that are sufficiently diversified to withstand the pressure from changes in economic and political environments globally. They debated the real value of illiquid premium, concluding that a modest allocation to illiquid assets is warranted. However, they warned that risks are oftentimes greater than the rewards in this space.

The panel also considered how ESG and climate change fit into the fiduciary duties of portfolio managers. ESG and climate change are macro factors and risk considerations that can’t be ignored, though they’re currently not considered through a proactive approach.

Finally, when asked about a pension fund’s key to success, the panellists suggested that investment managers need to successfully optimize portfolio construction. They recommended doing so by identifying value points, finding niche opportunities, expanding into assets that might fall through the gaps of standard asset classes, and focusing on sectors such as private debt, real estate, construction, and agriculture, as they bring yield, access the liquidity premium, and still show significant inefficiencies in the market.

Overall, conference speakers and panellists spoke on a remarkable number of diverse topics that held practical applications for attendees.