(January 2, 2012)—Unlike the editors at Time (Year of The Protestor? Blah), I’m going to be bold. No “on the one hand, on the other hand” arguments will be made here. Instead, here is what I think will happen in the next 365 days. Feel free to argue, discount, or bet the house on it.
Unlike 2011—which I labeled the Year of Stasis—I think 2012 will be as dynamic a year as we have seen in the institutional investing space. This is because economic indicators coming out of the last two months strike me as positive compared to the three years that preceded them. Consumer confidence is up sharply. Housing sale contracts are up sharply. Employment figures—even taking into account that many people stopped looking for work altogether—were more positive than almost everyone thought they would be. The European debt crisis, although limping along, looks to be stabilizing—European governments seem to be looking through every possible solution, and will eventually, I believe, find one that is palpable (it is this prediction that I am most shaky on, however).
The result: Markets will stabilize. Interest rates will rise ever so slightly, although not to any significant degree. Global growth, including that of America, will be good, not great. In short—things will be calm and relatively strong, and we’ll like it.
The result for the global institutional investing community is that we will see asset owners split into two groups—those that take advantage of this opportunity to act on the concerns of the past three years, and those that forget them.
As markets calm and rates rise slightly—improving funding ratios at corporate pension plans—smart funds will move into liability-driven investment solutions, or execute a pension buyout/buy-in. But some asset owners will forget that they don’t like volatility in their pension funds.
As many institutional investors look back and realize they don’t want to manage these assets—it’s not a core competency for many of them, after all—many will outsource some or all of their investment management, especially in the alternatives space. Consultants will want these assets as they expand their business models, and on the back of strong relationships with clients will gather some, but I suspect boutiques and established players will win relative to others. But some asset owners who aren’t committed to asset management will nevertheless forget that they aren’t that good or interested in managing these assets, and will continue to try to do it all themselves.
As investors look back and remember the painful drop in assets that they invariably experienced, many will pursue dynamic asset allocation, risk parity, tail-risk hedging, and other forms of real or perceived risk management solutions. But some will forget just how painful it is to endure sharp drawdowns in assets.
Finally, a certain set of asset owners will increasingly think of transition management, FX, and securities lending—often thought of back-office/insignificant decisions in the past—as they do other investments. If they don’t, they will continue to be taken advantage of in the pricing of these products, and they will be embarrassed when overcharging (alleged or otherwise) is brought to light. But some will forget the problems, and are bound to repeat them.
I could be proven wrong. Markets could continue to muddle along, or collapse altogether. The majority of institutional investors could forget how horrible 2008/2009 was, and fail to act on these concerns as markets improve and provide the opportunity for action. But I’m an optimist. The economic problems of the past three years are manmade, and they can be solved by man. The problems faced by institutional investors in the past three years are manmade, and they too can be solved by man. The year just begun will be the year where we do just that.