In today’s economic and geopolitical context, the future can feel extremely unpredictable, especially when it comes to growing portfolios and money. Retail investors trust financial institutions and other institutional investors with their money, while institutional investors trust their processes and analytical prowess. But how does it all get put to the test at a time when things are changing so rapidly? The Analyst summarizes conversations with four skilled financial professionals about their vision for the future and actionable insights that can help both institutional and retail investors.
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Sarah Butcher, MBA Sarah Butcher is a managing director, head of BlackRock’s Americas Institutional Business (AIB) in Canada and the Canadian territory lead for BlackRock’s institutional capital formation team, where she is responsible for developing and executing AIB’s strategy in Canada and delivering the firm’s full suite of investment capabilities and solutions to institutional clients across Canada. |
Brian Madden, CFA, CFP Brian Madden is the chief i investment officer at First Avenue Investment Counsel, where he leads the public markets investment team in formulating, executing and communicating investment strategies and processes across various investment mandates. Madden is past chair of CFA Society Toronto’s Board of Directors. |
Maxime Menard, MBA Maxime Menard is the global president and chief executive officer at Fiera Capital, where he is responsible for setting the firm’s strategic direction, driving global growth and ensuring operational excellence across all markets and investment platforms. |
Rhodri Preece, CFA Rhodri Preece is the senior head of research for CFA Institute, where he is responsible for leading the global research agenda of CFA Institute Research and Policy Center, originating and developing research projects on key investment themes and topics, managing the research staff and collaborating with leading investment practitioners and academics. |
Let’s explore some key trends and visions of the future as discussed by our experts, along with some examples of what different firms are doing related to these trends.
As markets become more complex, both in terms of product offerings and geopolitical pressures, interest rates continue to fluctuate, and inflation creates a sticky situation with a real risk of stagflation. The typical fixed income and equity mix may not provide the best returns and protection against inflation in portfolios. With stagflation, fixed income will see interest rates drop, while equity returns will not keep up with inflationary pressures entering a period of unstable pricing. There is a growing demand for more diversification, and private markets are becoming a key part of many portfolios.
For example, BlackRock is positioning itself to expand access for clients seeking exposure to private debt markets, among other actions. According to Butcher: “A broadening investor base is recognizing some of the potential benefits private credit may contribute to enhancing the overall expected risk-adjusted returns within a total portfolio context. BlackRock is excited to now be positioned to deliver for an expanding Canadian investor base.” As well, Fiera Capital is finding that the demand for real assets as protection against inflation are rising, and real estate is not the only real asset that investors are looking for.
Technologies based on artificial intelligence (AI) and machine learning are emerging as the next major revolution in almost all areas of life, including the financial industry. However, what AI is and how it can be used are still topics of discussion in most, if not all, organizations.
If used properly, AI can help reduce the time from ideation to implementation, says Menard. AI can save time in administrative efforts and probably result in fewer errors, save time and costs on mundane tasks and, if used properly, help unlock insights that are out there but just out of grasp.
For example, First Avenue Investment Counsel recently licensed a machine learning tool to help augment their stock selection. In a study conducted a few years ago, CFA Institute found that, along with generative AI, tokenization to distribute traditional products can help increase their availability. This would give retail investors access to traditionally institutional-grade products through fractional ownership.
Globally, international trade, capital flows and supply chains are becoming fragmented. This is causing economic blocks to form. Additionally, demographic trends are leading to shrinking labour support. As CFA Institute found, firms need to reassess their global footprint and adapt their services and product offerings to be more competitive and effective in the markets in which they operate.
BlackRock’s Investment Institute sees multiple potential long-term outcomes from the economic tug of war and is using scenarios to better inform its strategic views and identify opportunities.
Too often, sustainable finance and ESG are used synonymously, but they are not the same. Sustainable finance is under the umbrella of environment, social and governance (ESG). Governance has been a part of most organizations for a long time, but environmental and social issues are relatively new evaluation frameworks. All investors can apply the underlying ESG principles to manage risks and identify opportunities in their portfolios.
For example, Fiera Capital integrates ESG principles into every stage of the investment process and has strengthened its reporting on ESG by focusing on each aspect separately and finding opportunities to invest in projects that align with ESG objectives and therefore create long-term value.
While it’s good to know the key trends, what is more crucial is learning how to prepare for them in terms of anticipating market movements, managing investor expectations and implementing risk management controls. Some actionable insights are summarized below.
All the trends discussed above are important, but what types of financial risks do they pose? Quite often, market volatility, economic inflection points, liquidity disruption and balance sheet strength are tested. It is essential to understand exposures, manage potential asset and liquidity duration mismatches and have access to reliable funding sources. Stress testing balance sheets, especially for short term horizons, is key to managing against dynamic market shocks. As markets undergo various cycles, companies must be willing to adapt to innovations and developments.
areas where expertise or knowledge about the markets and their impact on valuations is lacking.
Risk awareness and management should be integral to the decision making process, rather than a back-end compliance step. Make it part of the company culture and integrate it into the entire organization. Given technological advances, particularly in AI, managing security and regulatory oversight at any firm is crucial, especially in mitigating third-party dependencies.
Increasing portfolio returns and managing portfolio risk can be achieved by diversifying across geographies and asset classes. Private markets and real assets can be a good source for managing currency risk and hedging against inflation, as they can be purchased with local or foreign currency and managed with local expertise, while the income from them can be immediately converted into a more stable currency. At Fiera Capital, dedicated portfolio managers, each focused on their strategy, bring expertise that allows them to create value across the full spectrum of investment solutions.
Additionally, sustainable finance and ESG can be useful and material factors in influencing risk and opportunities of a given investment. AI could be a valuable tool to help understand the unstructured data in this space. All these actions collectively contribute to making better decisions.
Global markets are constantly changing, and geopolitical situations are currently playing a bigger role in key decisions. AI and technological disruptions are simply adding to the risks. But with robust processes, strong investor relations, good decision-making, the right use of AI and adaptability, investors can achieve sustained growth in their portfolios over the long term.