2023 Knowledge Brokers

Tim Filla

Tim Filla joined Meketa in 2016 and has more than 20 years of investment management industry experience. Managing principal in the firm, he serves as a consultant on various defined benefit and health and welfare funds, public funds and nonprofits. Filla’s work includes the development of asset allocation and investment policies, as well as providing oversight and performance assessment of client portfolios. He is responsible for portfolio management of several of the firm’s discretionary client portfolios. Filla is a member of the Global Macroeconomic Investment, and Meketa’s Fiduciary Management (outsourced chief investment officer) investment committee.

Prior to joining the firm, Filla worked in investment management as an analyst and portfolio manager at a number of large investment management firms. He received a B.A. degree from the University of Pennsylvania. He holds the Chartered Alternative Investment Analyst designation and is a member of the CAIA Association. He also holds the Chartered Socially Responsible Investing Counselor designation.

CIO: What changes are you making to your asset allocation advice given the current state of monetary policy in a post-COVID, deglobalizing world and considering the impact of inflation and rising interest rates?

Filla: I have been calling this new environment “the new old normal” and believe we may have entered a new regime, which, in many respects, mirrors economic fundamentals of the past: primarily that economies and markets can function just fine at non-zero interest rates.

While asset allocation is client specific, for investors that have as their primary objective to solve for a set return target, the math has clearly changed. After a prolonged period of global interest rates that were essentially at zero, there are now additional considerations to face with portfolio construction. Based on Meketa’s “2023 Capital Market Expectations,” most fixed-income and credit categories have higher (~200 basis points) projected returns, and that means there are more options available for investors solving for return targets of 7% or higher. Credit in particular offers strong return potential but with risk-diversifying characteristics/investment structures.

In the prolonged period of extremely low interest rates, many investors were forced to reduce fixed-income and credit allocations and accept additional risk to achieve their objectives. I believe investors should evaluate de-risking somewhat to capitalize on the opportunity to diversify afforded by this new interest-rate regime.

CIO: What (actionable thing) have you learned over the course of your career that has proven itself this year?

Filla: The most actionable and valuable thing I have learned over my career is to always question the consensus or the conventional thinking.

This year so far has provided a strong example of the value of questioning consensus. After a period of rising rates drove losses across financial markets in 2022, the consensus view for 2023 called for a recession. That view was anchored to a few tenets: An inverted yield curve leads to a recession; the Fed always makes a policy mistake and overtightens interest rates; and rapid tightening eventually leads to a spike in unemployment.

There is evidence to support each of those statements, but 2023 has proved it is important to understand what may drive a different outcome:

  1. This yield-curve inversion happened following an extended period of zero rates, a global pandemic and the stimulus-fueled recovery at a time of declining global growth driven by deglobalization and demographics;
  2. The Fed has better data, tools and communication strategies than ever before; and
  3. Healthy consumers and corporations, combined with post-pandemic labor market dynamics, may allow for the absorption of higher rates for longer without significant disruption.

I’m not advocating for always being a contrarian but believe there is tremendous merit in challenging the consensus, which is often based on the most simplistic analysis or binary assumptions. The financial markets just don’t work that way, and the rigor of deeper analysis is rewarded over time.

CIO: What macro themes will drive the most volatility for institutional investors over the next 10 years?

Filla: Unfortunately, I believe it will be increasing political tension and divisions. We are clearly seeing this already, on the global stage but also within nations. Hitting on the theme of the new old normal again, we have all lived in and benefited from a 30-year period of relative peace globally, with conflicts limited to relatively isolated developing nations until last year. In that environment of relative stability, economic globalization accelerated benefiting developed nations with disinflation and emerging nations with strong economic growth. That period seems in jeopardy, with tensions again rising between larger economic and military powers.

To use the U.S. as an example, at the national level we are experiencing rising polarization between parties and regions of the country. This came to the fore when Fitch Ratings downgraded the U.S.’s credit rating following the most recent debt limit stand-off and specifically cited “steady deterioration in standards of governance” as a factor. At the same time, increased tensions with China are leading to economic deglobalization and heightened conflict risk.

At the extremes, these rising tensions represent potentially severe event risk but, more practically, at least appear likely to contribute to volatility over the coming decade.

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