2016 Summer Roundtable in Cambridge, MAJuly 27-29, 2016
The Chaos Theory could provide a useful means of understanding the world in 2016. Simply stated, the theory accounts for the infinite possibilities that are created from minimal changes in the environment. Understanding chaos has allowed for a deeper appreciation for the complexities of our atmosphere, ecosystems and social systems, to name a few fields. Financial markets and economic systems also adhere to this theory. As PPI members know well, slight changes to the external environment could have a monumental impact on markets. Understanding and measuring these changes and how they impact markets is a critical responsibility of institutional investors and shaped PPI Summer Roundtable discussions in Cambridge, Massachusetts, July 27-29, 2016.
At the February PPI Winter Roundtable in Los Angeles, we considered the characteristics of the present low- growth, low-return environment. The challenge of understanding the “chaos” of the markets in the current setting is key. In Cambridge, we continued with discussions on risk in a period where chaos—in our markets, politics, and societies—has dominated. The Summer Roundtable featured robust discussions on how institutional investors are navigating this opaque landscape; what risks are on their minds; and where, if anywhere, do they see opportunities. While opportunities do exist, the pessimism of the markets was reflected in the outlook of institutional investors and summarized in one question we asked the audience: “What nominal rate of return do you believe is possible over the next business cycle?” Ninety-four percent of respondents indicated that they don’t believe that a 7% return is possible.
Many participants noted that while return expectations will remain low in the coming years, the need to meet liabilities is ever present. Meeting return shortfalls and understanding the associated risks in an environment marked by overvaluations and equity volatility, will be a key challenge for many institutional investors in the years to come.
While the roundtable focused on the myriad risks facing institutional investors today, many participants commented on investment opportunities that still exist. The realities of the “new normal” environment of lower equity and bond returns were reflected by participants, but many pointed to opportunities in markets and asset classes further afield. How these opportunities are accessed—particularly by investors who do not have the capacity or mandate to invest extensively in alternatives or emerging markets—will be another obstacle to overcome.
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