Turbulent markets, the return of inflation, and growing tensions between China and the U.S. are pushing some institutions to make big changes.
Paul Colonna, president and CIO of Lockheed Martin Investment Management Company, said the corporate pension fund has put money into a broad range of Chinese investments over the years. But that strategy has now changed.
“We’ve done everything in China, but we’re doing less as risk premiums are significantly higher, and there are better opportunities,” Colonna said, speaking on a panel addressing institutional investors at the Greenwich Economic Forum in Greenwich, Connecticut on Tuesday. He said the pension will likely move more money toward the U.S. over the next five to 10 years. The U.S. already represents 75 to 80 percent of the portfolio.
Fellow panelists Jay Madia, head of risk assets at insurance company Axis Capital, and Harshal Chaudhari, CIO of GE Global Pension, agreed on shifting away from China.
Said Madia, “We’re not actively allocating to [the country] right now.” Chaudhari noted that his team is paying close attention to issues in China and argued that India, with similar demographics, may be a good alternative to the world’s second largest economy.
But Mark Burgess, chairman of the investment committee at the Hesta superfund, said that as an international allocator in Australia, he has a different perspective on China than many other big investors — and he’s confident that China is trying hard to fix its problems. Most global investors, including Hesta, can’t ignore the country and will continue to maintain some exposure to China.
Still, Burgess prefers India, Indonesia, and the Philippines, all of which are demographic plays like China.
Allocators are making some opportunistic bets as well, including shifting toward value stocks and away from growth, which outperformed for years. Colonna said he’s moving money from growth to value across Lockheed Martin’s public equity book. The corporate pension CIO said he’s also making bigger bets on active managers, who he believes can help protect the portfolio from market volatility, while also deploying more hedges. “We are doing more portfolio hedging than ever, and tactically looking at the U.S. equity market,” he said.
Chaudhari said the most important issue for the GE pension is positioning itself for inflation. “In fixed income you’re finally getting paid,” he said. High yield can pay 10 percent, for example. Even if defaults rise, “the risk-reward is better,” he said. The pension fund is now tilting to higher quality bonds and domestic issuers.
GE has been underweight technology and health care, and Chaudhari is now looking to grow its exposure to these sectors. The pension also has been actively selling real estate holdings in the second half of 2021 and the first half of 2022, realizing gains in multi-family and commercial offices, which had risen significantly in value. “We were amazed at the marks,” he said.
With markets around the world diverging — acting very different from one another, GE has also doubled its allocation to global macro in the last year.
Burgess said the world is changing and returns are going to come from very different strategies going forward than they have in the last decade. Take currencies, for example. “If I were running a big pension in the U.S., I would start putting money in offshore currencies,” he said. “The U.S. is absurdly expensive.”