Five global megatrends stretching past the current economic cycle are front of mind for the ASB investment team in building productive portfolios.
Frank Jasper, a member of the investment committee, says the world is “becoming more dynamic and ever-changing, and flexibility is required for managing money and changing portfolios.
“The important thing is to keep focusing on driving risk-adjusted returns for New Zealand investors.
“There are choices over managing money: You can build a concentrated portfolio selecting a handful of stocks and hope it works; or take a passive approach and assume the market returns are as good as it gets,” he says.
“We operate somewhere in the middle, looking to enhance returns through a number of well-diversified smaller positions.
“If all goes to plan, this approach adds value without a lot of risk. In our view, that’s a smart approach to money management.
“The active day-to-day decisions are very much at the margins. If you boost portfolio returns even half a per cent each year, then investors are better off over 20 to 30 years of compounding.
“It makes a real difference to the quality of people’s retirement or the value of their nest egg,” says Jasper.
Established in 1988, BlackRock is now the world’s largest asset manager with US$10 trillion under management, as at December last year.
Frank Jasper is a member of the ASB Investment Committee.
BlackRock acts as ASB’s chief investment officer giving the investment committee access to global insights and expertise in areas such as asset allocation, investment stewardship and product innovation.
An important driver of ASB’s portfolios is BlackRock’s five mega-forces. These are long-term trends that are creating structural change and investment opportunities.
The forces will change the long-term growth and inflation outlook and create big shifts in profitability across economies and sectors. They are:
Digital disruption and artificial intelligence (AI)
Jasper says advances in computing hardware and deep learning innovations led to an inflection point for AI in late 2022, and these advances are likely to be exponential, impacting productivity and the way businesses are run.
“We see investment opportunities moving right up the stack as technology evolves — from hardware manufacturers to digital and data infrastructure, and ultimately to applications.”
Transition to low carbon economy (massive reallocation of capital)
Jasper says this is not just about identifying opportunities in renewables; traditional energy companies can outperform, especially where there are supply-demand mismatches.
“We see climate resilience becoming an important investment story — this is the ability to prepare for, adapt to and withstand climate hazards and to build resilience for climate change.”
Jasper says cascading crises have accelerated global fragmentation and the rise of competing geopolitical and economic blocs.
“Countries like Vietnam and Mexico could benefit from the diversification of supply chains. We see opportunities in the Gulf states, India and Brazil which are pursuing ties with multiple blocs, and have valuable resources and supply chain inputs.”
Demographic divergence, massive reallocation of capital
Jasper says there are ageing populations in major Western economies and younger, growing middle classes in emerging economies.
The contrast will dictate how much countries can produce and grow, and what goods and services are consumed.
Future of finance
BlackRock highlights households and companies are changing how they use cash, borrow and transact. This, allied with capital pressures on banks which opens a path for private credit and non-banks to fill the lending void.
· Climate policy gridlock — developed countries fail to increase public investment to achieve net zero carbon emission targets
Jasper says the ASB portfolio has had good exposure to digital disruption and AI during the past two years with the preference for global equities over Australasian shares — a position that has performed well.
“As the benefits of AI broaden to other segments of the market, we’d like to maintain the exposure to this theme but broaden the ways the portfolio will benefit from continued advances.
“The big tech stocks (the Magnificent Seven of Amazon, Alphabet/Google, Apple, Meta/Facebook, Microsoft, Nvidia and Tesla) are not getting any cheaper, although we acknowledge there is a wide range of potential future outcomes and these companies are hard to value.
“We are considering a modest trimming of these mega cap stocks from current allocations and looking at the second tier of beneficiaries such as data centres, utilities and energy companies.”
Jasper says global listed infrastructure funds is an increasingly attractive asset class given their valuations, and aid the diversification from global equities now more concentrated with the rise of the Magnificent Seven.
He says the portfolio’s exposure to global shares is benchmarked to the MSCI World Climate Paris Aligned Index. This sees the portfolio tilting to companies that are expected to benefit from the low carbon transition and away from those which may be exposed to physical and transition risk.
A dedicated allocation to emerging market equities provide exposure to geopolitical fragmentation and demographic divergence.
Many emerging countries are set to grow because of their working age population growth, while the working age population continues to decline in developed economies.
Jasper says “we are pivoting back to New Zealand fixed income. The economy is tough out there and ultimately that should provide some room for interest rates to start falling.
“We are looking at reducing our exposure to global interest rates and buying longer-term New Zealand government bonds. As interest rates fall, we can get a capital gain on existing bonds.”
Jasper says the portfolio asset allocations are largely shares and fixed income.
But the addition of gold (about 3 per cent of the portfolio) has been a good diversifier over the last couple of years, particularly with lower expectations around the level of diversification that may be offered on fixed income. “Gold performs differently to the sharemarket and is strong when the markets are feeling vulnerable and risky. Inflation is remaining sticky and hard to stop, and gold can play a role.
“Another nice diversifier is foreign currency, with exposure in the United States, Europe and Emerging markets. When risk goes up and sharemarkets fall, the NZ dollar tends to weaken.”
Within fixed income, the preference for both US and New Zealand Inflation Linked Bonds aligns with the stickier inflation environment in the period ahead and “we believe markets under-appreciated this.”
Jasper says “we haven’t yet participated in private equity and venture capital, although we are considering it. Neither have we allocated any of our portfolio to cryptocurrency.
Jasper says ASB maintains its preference for unhedged global equities and taking advantage of the foreign currency exposure. “In this case, we are exposed to both the risk of the shares themselves as well as the variations in the value of the NZ dollar.”
He says the investment committee would love to allocate more New Zealand assets but this needs to be seen in the context of maximising risk-adjusted returns.
“New Zealand would benefit from more vibrant capital markets and more globally competitive listed businesses. We need to foster education and entrepreneurship, build global competitiveness and harness the global mega trends.”
Rocket Lab is a great example of New Zealand entrepreneurship but it hasn’t listed here. Xero moved its listing offshore. “If we have more good companies grown in New Zealand, then the market will more likely get its fair share of listings. Capital will follow good ideas,” says Jasper.
· Frank Jasper is a member of the ASB Investment Committee, helping build ASB’s investment solutions for over 500,000 KiwiSaver and ASB wealth clients. He has an extensive background in financial markets having been both Chief Investment Officer and a Senior Portfolio Manager at Fisher Funds. He has also worked on the sell side as Investment Strategist for ABN Amro Craigs and advised some of New Zealand’s largest asset owners and pension plans as Head of Research for Mercer Investment Consulting. Frank is passionate about empowering New Zealanders to build their knowledge, financial literacy and wealth.
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