Trade war threat sparks allocation rethink by asset owners

Geopolitical uncertainty, particularly the spectre of a global trade war and its ensuing market fallout, was top of mind for asset owners surveyed in part one of Morningstar's annual Voice of the Asset Owner Survey.

Of the asset owners surveyed, nearly half of which come from Australia and New Zealand, concerns around the status of the Ukraine-Russia conflict, global economic volatility, and US-China relations were also consistently raised.

Morningstar said that amid these geopolitical vagaries and elevated volatility, asset owners are scrutinising their portfolio allocations, weighing a retreat from the US.

"I think we've seen peak exposure to the US, and we'll be lowering our weighting. And the way we're thinking at the moment is likely to be up-weighting to Europe and potentially bringing some funds back onshore," one superannuation fund representative said.

As asset owners rethink their allocations, private markets were also increasingly viewed as a strategic investment, affording them more direct influence over company operations and, potentially, less regulatory restrictions.

"... we could take some really, really bad stuff in private equity and make it really, really good because we have more control there. Actually having more initial carbon emission exposure in private equity and having a steeper downward transition path can deliver more meaningful emission reduction outcomes," a second super fund representative said.

"This could enable us to both deliver more impact and achieve better investment returns."

A third super fund representative said that more capital is being allocated to private credit.

That representative also noted, "historically, we had very little in private equity."

However, in the past year, the fund has begun exploring opportunities in that space, and "that would continue," the representative said.

Following changing trade policy, regulatory flux emerged as the next major concern for asset owners.

"... the asset owner community appears to be looking for more clarity and consistency around regulation to make cross-border investing easier and more straightforward," Morningstar said.

"Concerns were also expressed around regulatory rollbacks occurring in the US with the new administration and, to a certain extent, in Europe with the EU Omnibus Proposal.

"Asset owners seem concerned primarily from a tactical standpoint, i.e., less data and information requirements put on companies and markets may translate into less tangible data to help make decisions and chart a global investment direction."

One super fund representative said the industry faces "some tension" over the lack of standardisation around the taxonomy or the way of measuring these types of issues.

"And that has led to confusion ultimately around sort of end investors and consumers...," the representative said.

Another super fund representative added that having standardisation and requirements around regulated reporting is "a necessary outcome."