Asset owners prepare portfolios for systemic risks
A study by WTW's Thinking Ahead Institute and Australia's Future Fund reveals that the world's largest investment organisations are increasingly aware of 'systemic risks' and are prepared to address them through sustainability measures and holistic fund strategies.
The Global Asset Owner Peer Study found that a record 88% of surveyed asset owners expect systemic risks to grow in frequency and magnitude. General systemic risk factors, particularly geopolitical confrontation, are major concerns for these asset owners.
Beyond geopolitical issues, climate-related changes are also becoming a primary concern
“The main response from asset owners has been the development of scenarios, predominantly in the climate area. There are early signs that the next move will be into deeper work on resilience and adaptation to lay the groundwork for a more uncertain and turbulent future,” Roger Urwin, co-founder of the Thinking Ahead Institute, told AsianInvestor.
When asked to identify their top three concerns related to systemic risks, 84% of respondents included geopolitical confrontation. Climate change escalation was the second-most prevalent concern at 72%, while 48% highlighted inequality and social challenges, including polarisation and the erosion of social cohesion.
Other notable concerns include the robustness of the financial system, biodiversity loss, cybercrime, and the impact of AI and other frontier technologies.
EYEING OPPORTUNITIES
Uncertainty and instability could also reveal investment opportunities in the turmoil. As such, asset owners are inclined to view risk as a potential source of upside.
“Notably the climate solutions is seen as attractive in principle with many funds having clear allocation targets to reach over time. But it’s been harder to find attractively priced opportunities allowing for the risks and uncertainties involved,” Urwin said.
With a growing variety of external factors, opportunities and threats, 73% of investment organisations now say managing complexity is a top concern.
The 26 asset owners in the peer group for this study represent over $6 trillion of assets under management. Nine of the asset owners participating in the study are based in Asia Pacific, including Australia's sovereign wealth fund, Future Fund.
PORTFOLIO SHIFT
Regarding expected portfolio adjustments over the next five years, 35% of respondents plan to increase alternative investments, compared to 12% for bonds and 8% for equities. Conversely, 23% expect to decrease equities, while 15% and 4% anticipate reducing bonds and alternatives, respectively.
The study found that among surveyed asset owners, a 40-30-30 portfolio target (roughly 40% equity, 30% fixed income and debt, and 30% private assets) is replacing the well-known 60-40 model (60% fixed income, 40% equities).
Urwin pointed out that the substantial increase in allocations to alternatives over the past decade has achieved both return and net risk improvements, with clear gains from wider diversification, illiquidity premium capture, and skill-based strategies.
“The challenge is making sure these benefits continue given the crowding of capital and the big costs attached. The private markets strategy requires a highly selective approach with strong insourcing and outsourcing in a joined-up combination,” Urwin said.