The challenges of explaining long-term performance
Academic research shows that global issues account for a large share of explanatory power among the factors that explain long-term company performance.1
Therefore, understanding these global phenomena and navigating them will be paramount for investors in the 21st century.
This is a special challenge because global developments are notoriously difficult to predict and measure. It is also worth noting that uncertainty in itself impacts
investment decisions, as many investors would even prefer a (mildly) negative, but certain outcome over an uncertain situation with a wide range of outcomes.
However, in the last decade, we have realized that the unknowns that have destroyed companies and industries were not risks but uncertainties that came in the form of global trends, catastrophes and systemic crises.
There are several examples of the uncertainty surrounding the impact of disruptive trends. For instance, all incumbent carmakers acknowledge that electric cars are the future with potentially enormous implications for the current business models of today’s leading car manufacturers. But uncertainty remains very high with regards to which business model will ultimately prevail.
Managing uncertainty in our age requires a different mindset and new processes. In the new world that we envision for investors, the use of traditional risk measurement and management frameworks is severely limited. We might need a new paradigm for investing.
We believe long-term investors should recognize key global megatrends that will affect countries, sectors and companies in the decades to come. We argue that long-term analysis that is based on global trends requires moving away from “scenario-thinking” to take into account long-term global trends and to follow them over time, building resilient strategies around them.
3 long-tem trends identified at the Sovereign Investment Circle
Research suggests that a 10% increase in a country’s population aged 60+ could decrease economic growth per person by 5.5%.2
Aging will mean a redistribution of wealth and the need for new products and services. This will require new investable projects in infrastructure, healthcare and wellness industries and housing.
We will likely witness the emergence of new disruptive industries. But how can we, from an investment standpoint, cope with yet unknown sectors?
Agility is important - the ability to spot disruptors and disrupted can provide opportunities to generate extra returns or avoid permanent losses.
Climate change is an important driver of sustainable strategies which may have different effects across economies, sectors, and asset returns.
According to some estimates, in the 300-plus cities around the globe that generate more than half of the world GDP, the impact of climate change will place USD 1.5 trillion of this production at risk.3
All investors should incorporate climate change in their investment framework.
Sovereign Investment Circle
The UBS Asset Management-IMD Sovereign Investment Circle, is an exclusive, invitation-only seminar.
It brings together global experts from world-leading business school IMD, UBS Asset Management’s investment teams, leading sovereign institutions and others for a very special week-long conference focused on the most critical issues sovereign investors could take into account in their investment strategies.
From March 25 – 29, we will be holding the second Sovereign Investment Circle at the luxurious, private setting of the historic Singapore Command House. This intimate seminar will offer deep dives into the topics many sovereign investors are concerned about today, and is aimed at generating new, innovative and investable ideas ready for implementation.
Benno Klingenberg-Timm, Head of Global Sovereign Markets APAC spoke with the Sovereign Wealth Fund Institute (SWFI) on climate change and how sovereign wealth funds should invest through and beyond disruption. More
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