2023 Knowledge Brokers

Allan Martin

Allan C. Martin joined NEPC in 2000. In 2018, he was named a Chief Investment Officer Knowledge Broker and at the CIO Industry Innovation Awards, he was named Consultant of the Year. He currently advises six large public pension funds.

Prior to joining NEPC, Martin worked for four years at Dresdner RCM Global Investors in San Francisco as managing director and partner for global marketing and client services.

Previously, Martin worked at Bankers Trust Company in New York for 26 years in various investment management, consulting and trustee/master custody capacities. His last position at BT was managing director of the $400 billion Global Retirement Services Group, the umbrella organization encompassing the full array of BT’s investment and administrative services for public and private pension and endowment funds.

Martin earned an MBA in finance/operations research from Stanford University in 1969 and a B.A. in mathematics, cum laude, from Stanford in 1967.

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?

Martin: Investors experienced a paradigm shift in 2022, as central banks transitioned from supporting economic growth to combating inflation. This paradigm shift will reset the expectations for investors, capital markets, economies, consumers and corporations across the globe. This transition is forcing a broad re-pricing across all financial assets, and higher discount rates are likely to challenge the capital market structures that thrived over the last decade. The 40-year interest rate super cycle has ended, and capital markets are only beginning to reflect an environment of higher discount rates and an increased cost of capital. With this regime shift, we are focused on the implications of three core themes:

  • Tight Monetary Policy and High Discount Rates: We are encouraging the adoption of more defensive asset allocation structures, adding greater exposure to equities, public and private, embracing the risk-return benefits of higher contractual income, public and especially private, and dedicated allocations to Treasurys and other defensive assets.
  • Importance of Real Returns: Nominal returns have been the primary consideration of the last 10 years, and this is likely to change over the next decade. To this end, we are looking to identify high-carry assets to add to portfolios while also considering the use of inflation-sensitive assets.
  • Disruption to Portfolio Construction: Rising interest rates and sticky inflation levels disrupt traditional asset allocation structures, and we encourage investors to explore the use of diversifying assets to hold greater liquidity and to review strategic policy targets for portfolios.

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

Martin: Building a successful investment program in a dynamic and ever-changing economic and political environment requires insight into fundamental economic and investment activities and principals, a rational framework for incorporating and assessing new research and information, fortitude to stay the course when short-term disruptions occur and the courage to act when others are in distress. In volatile and stressful times, it is important to remember that a well-reasoned long-term asset allocation plan, appropriately diversified to provide protection in adverse environments, is the best protection against long-term capital loss. For example, those who recognized the implications of the ensuing capital shortage occasioned by the Global Financial crisis in 2008 and acted by adopting strategic allocations to private credit were handsomely rewarded. More recently, the failure of Silicon Valley Bank and other regional banks presented additional opportunities to increase and refine private credit allocations.

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

Martin: The likely answer to this question is a new theme or risk that is outside of the traditional consensus and will represent a surprise relative to current market views. An investor in 2005 would not have anticipated that cash rates would sit near 0% for a decade plus. The same is true today: We have been accustomed to a low interest rate environment, and Treasury rates above 6% are viewed as very unlikely. The post-World War II era has been dominated by a period of multinational negation and removal of trade barriers, leading to an unprecedented growth in international trade. Unfortunately, the concomitant growth in world GDP over this period has not been distributed evenly across income levels, leading to the current state of political polarization, which has the potential to stall or disrupt global trade and foster the reemergence of nationalism. Part of this theme to consider in the nearer term is China’s relationship with the U.S. Will the economic relationship be dependent on economic competition or economic conflict? The path of this trend has global implications for inflation and economic productivity. Lastly, the trajectory of the U.S. dollar influences global financial stability, and the trajectory of Fed monetary policy relative to other central banks will heavily influence the strength of the U.S. dollar. In the longer term, the world’s population is aging, and productivity continues to rise, so the norm of wealth distribution based on work performed will be challenged, with significant implications for the return to capital.

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