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Click here to download the 2015 CREATE Report.
ERNEST MCCRARY: Hello, and welcome to today’s discussion on global asset management trends. I’m Ernest McCrary, editor of custom media for Institutional Investor magazine. We’ll be talking to Barbara McKenzie, senior executive director and chief operating officer of Principal Global Investors. This is part of a four video series about the results of a new report from Create Research. These studies have been sponsored for the past seven years by Principal Global Investors. This year’s study reflects the thinking of asset managers of more than 700 funds around the world representing nearly $27 trillion of combined assets under management. Barb, thanks for joining us today, let’s get started by putting this Create report into some perspective. How is this research conducted and how does PGI use it for yourself and your clients?
BARBARA MCKENZIE: Sure, thanks, Ernie. Dr. Rashan (phonetic) over in London does the survey behind the Create report each year and does interview hundreds of asset managers and people on the buy side community on a global basis. So it is a great way for Principal Global Investors, as well as our clients, to really understand trends and what’s playing out on a real time basis.
MCCRARY: How does this play out into the activities going on in capital markets also though?
MCKENZIE: Well the capital markets side of the equation is changing pretty dramatically. In a world filled with quantitative easing in developed markets, interest rates are at unprecedented lows today and as a result we’re seeing different behaviors. As you might imagine, households are still pretty shy, they are actually continuing to de-lever, and the financial sector, due to all the new regulations that have come out post global financial crisis, again is de-levering, but corporates, in particular, and obviously in governments because of all the quantitative easing, are both increasing their debt burdens. Right along side that we’re also seeing non-bank financials appear on a global basis, so lending is coming into the marketplace in nontraditional manners that we really haven’t seen before.
MCCRARY: I think one of the key findings of this study was that investors want a more pragmatic approach to their investments now and they also want more bond like performance. Can you explain what’s behind this and how does that work?
MCKENZIE: Sure. Well investors today are much less married to traditional asset allocation methodologies. Again, because of the incredibly low yields in the bond world more and more investors are being enticed into risk assets in particular equities in that search for yield. As they’re going down that risk route, however, they are so mindful of risk, so oftentimes they’re selecting equities that look somewhat bond like. Issuers that pay higher dividend rates, for example, good quality companies with strong fundamentals, so they’re definitely leading the pack in terms of interest by traditional bond investing audiences.
MCCRARY: So that means there is really a bias in favor of equities today, are people taking on maybe too much risk?
MCKENZIE: Well time will tell but certainly that is one risk that could play out, with the end of quantitative easing coming nearer and nearer in the US and the amount of risk and leverage in the system ramping up again, we’ll have to see how that works for investors.
MCCRARY: Well eventually when the quantitative easing process does begin to change, what happens then, will investors still stick with equities and if they do, will there be favoritism to certain countries?
MCKENZIE: Well a couple of things will dictate where investors go, and again, when you think about the mindset today, it’s less about whether it’s a bond instrument or an equity instrument, it’s more about where they need to go to get the return stream that they’re looking for.
If equities continue to perform well, I do believe there will continue to be interest in that asset class, but that interest in bonds will more be predicated upon just the sheer return potential of bonds. So if we see interest rates come up a little bit but not really advance in terms of the return potential, you could get into an environment where not a lot changes, even though QE is coming to an end in the US.
MCCRARY: I wanted to look especially at the behavior of Asian investors, huge pools of capital available there. How are they going to respond to this and particularly with regard to opportunities in Europe?
MCKENZIE: Well, Asian investors, for the most part, missed the quantitative easing bounce, both in the US and in Japan, so I think they’re exhibiting more interest in European equities, recognizing that traditionally, at least, at the beginning of a QE phase with central banks, you do tend to see a better, healthier environment for stocks. So having missed the last two QE bounces, I think they’re trying to get in on the European one.
MCCRARY: Well this is interesting because does it mean that these investors will be changing the ways they select their managers and the ways they use them?
MCKENZIE: Well we are hearing from some of our large institutional investors in Asia that they are more interested in investing in specific countries, even than regions today. And that’s a harder thing for them to accomplish, it’s going to take more time and it’s interesting to see them at least exhibit an interest in going back into country or regional investing where after the crisis everyone sort of shifted to global and decided it was better to hire good managers who could opportunistically move with the times between countries, now more of our clients are starting to say, no, we want to hold some of those decisions ourselves. We’ll see whether their governance permits them to be nimble enough to take advantage of those market changes.
MCCRARY: We mentioned the bondification or bond like performance that investors want before, but in this time when QE starts to ease, will there still be a favoritism to equities and will their strategies continue?
MCKENZIE: Sure. I do think as long as interest rates don’t rise significantly, we’ll continue to see interest in equities. Again, I think investors are far more concerned with outcomes today than they are with asset classes and I don’t feel like that’s going to change just because quantitative easing is being removed.
MCCRARY: Barb, thanks for these insights. We look forward to continuing these discussions with you on the next video about the findings from the Create Research report.
MCKENZIE: Thank you.
MCCRARY: Thanks.