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INVESTED in DISRUPTION IQ Redefining Investment Performance Q3 & 4 2017 INVESTED IN DISRUPTION IQ Redefining Investment Performance The New Alternatives Paradigm Disruption in Action Demography and Destiny Q3&4 2017 IQ magazine provides the most relevant thought IQ leadership from State Street Global Advisors. We live in an age of disruption, in which business models, industries and even our daily lives are being transformed. As the pace of disruption accelerates, we look at game-changing shifts that are redefining ideas around investment performance and value and how investors can navigate this new landscape. State Street Global Advisors 2 4 ALL CHANGE While macroeconomic conditions might suggest a return to “normal,” disruptions on all sides require investors to embrace change and look for the opportunities. 8 CHANGE THE GOAL, CHANGE THE GAME In our latest investment roundtable, we look at how institutional investors are redefining ideas of performance and value beyond traditional metrics. 14 THE NEW ALTERNATIVES PARADIGM Alternatives remain an important portfolio component, but liquidity lessons and factor approaches are transforming how investors build their exposures. 20 DISRUPTION IN ACTION Automobiles, healthcare and retail are in the front lines of creative destruction: we look at what those disruptions mean for investors. 32 DEMOGRAPHIC DISRUPTION Ageing populations around the world are challenging assumptions about saving and investing. State Street Global Advisors 3 RICK LACAILLE Global Chief Investment Officer ALL State Street Global Advisors CHANGEAs we move into the final stretch of 2017, the global economy continues to grind higher, with overall growth for the year slated to improve for the first time in three years. While the stimulus expected from the new Trump administration has languished, the equity bull market in the US nonetheless is charging into its ninth year. Unemployment in many advanced economies has reached multi-year lows, yet wages and inflation remain tame. State Street Global Advisors 4 While we may have reached an important inflection point in the global economic recovery cycle, the kinds of structural forces that are transforming companies, industries and economies make it difficult to think in terms of any normal: new, old or otherwise. With a more advanced recovery While we may have reached an Game-Changing in the US, the Fed has already important inflection point in the global started to normalize monetary economic recovery cycle, the kinds of Goals structural forces that are transforming policy, while other central banks companies, industries and economies We start with disruptions in our own have signaled they will begin make it difficult to think in terms of investment management industry, tapering their accommodative any normal: new, old or otherwise. where long-term investors are policies as well. Ten years after the Instead, we expect that disruptions on broadening the definitions of value, first tremors of what would become many levels are set to accelerate, and performance and objectives beyond a global financial crisis, are we finally discerning investors need to apply an all-change view to the world to traditional metrics. Rather than returning to “normal”? understand and capitalize on them. risk-adjusted returns alone, we need Figure 1 Global Real Activity Has Improved — World, CPB World Trade Monitor % Change Y/Y 6 5 Industrial Production 4 Excluding Construction 3 2 1 0 Total 1 2012 2013 2014 201 201 2017 Source: Macrobond, SSGA Economics, Netherlands Bureau for Economic Policy Analysis (CPB). Updated as of June 13, 2017. CPB World Trade Monitor is a monthly time series that aggregates and summarizes data on both international trade and industrial production. State Street Global Advisors 5 All Change Figure 2 Old vs New Battle of the Titans in Retail Market Capitalization (billions) 476.3 17.1 AMAZON 1998 2017 8.9 MACY’S INC 6.7 Source: Bloomberg as of September 14, 2017. to focus on risk-adjusted outcomes, Other institutional investors are Continuing our all-change theme, we defined across a far wider array of developing similarly broad goals and look at how dynamic factor-based criteria. In our latest investment are pushing their investment strategies are disrupting the hedge roundtable, we hear from the managers to develop better data and fund world. A new generation of long/ outgoing head of the second largest processes to achieve them, as we short systematic approaches is able to pension fund in the Netherlands, learn from Rebecca Fender of the capture many of the same premia Else Bos, on why she believes large CFA Institute, who leads their Future that were once the sole realm of asset owners need to account for the of Finance practice. We also get an traditional hedge fund trading broader economic, environmental update from Lou Maiuri of State strategies, and are now available in a and social impact of their Street’s Global Exchange group, far more fee-efficient format. We investments. In her new role at the which is already applying artificial have now launched our own version Dutch central bank overseeing intelligence (AI) and machine of this approach for investors seeking pension plans and insurance learning technologies to improve the uncorrelated sources of alpha, which companies, she will continue to quality and consistency of ESG data also help to protect on the downside. promote the national sustainability to help asset owners and asset In addition, we describe a new and development goals she helped managers better assess those more efficient way for institutional spearhead during her time at PGGM. non-financial impacts. investors to source bond liquidity in order to acquire, dispose of, or tactically shift fixed income assets within our large pools of seasoned credit assets. State Street Global Advisors 6 All Change Sector Disruption The consumer discretionary sector is Demographic also transforming before our eyes, Perhaps the quickest acceleration with Amazon redefining modern Destinies of change is happening in some of retail value chains. But what would a Finally, we introduce the work of the most traditional industries that disruptor of Amazon look like? Our Amlan Roy, our new Global Chief are being disrupted and sector analysts describe the three Retirement Strategist, who has spent disintermediated beyond technology-driven trends retailers his entire career analyzing the recognition, as our sector need to harness to challenge the intricacies of global demographics analysts describe. Major car consumer behemoth. and their effects on economies and companies are already planning markets. Amlan lays out the five for a not-too-distant future in which most important impacts of the owner-driver model that has Old Titans demographic changes and discusses prevailed since the industry’s Versus New how policymakers and investors inception gives way to large, should respond. Along with automated car sharing platforms. While aging demographics and technology-driven transformations, As GM President Dan Amman has technology advances create tailwinds demographics is perhaps one of the remarked, “we expect to see more for the healthcare industry, pricing most disruptive forces reshaping the change in our industry in the next pressures are forcing companies to global economy and capital flows. As five years than there has been over overhaul their business models to such, we consider it a key input into the last 50.” We look at the first reduce costs and accelerate the time our long-term, top-down analysis stage of that transition, as battery to market for blockbuster drugs. and investment decision-making. n electric vehicles overtake the As big data and machine learning machine that ruled the road for transform the drug discovery process more than a century: the internal itself, mergers and acquisitions combustion engine. (M&A) have become a new form of research and development (R&D), allowing companies to leapfrog the usual 10–15 year development process by acquiring more mature Perhaps the quickest pipelines for innovative therapies. acceleration of change is happening in some of the most traditional industries that are being disrupted and disintermediated beyond recognition State Street Global Advisors 7 INVESTMENT ROUNDTABLE CHANGE THE LENS, CHANGE THE GOAL, CHANGE THE GAME As the age of disruption challenges New technology, big data and factor-based approaches are disrupting conventional approaches to portfolio long-held assumptions across management. However, we believe even more far- companies and industries, it is not reaching changes are occurring as institutional surprising that investment investors redefine their objectives beyond traditional portfolio metrics and look at the broader impact of management is also undergoing their investment choices. In this latest investment major shifts. roundtable, we speak to industry stakeholders about what this shift in perspectives on performance and value will mean for asset owners and asset managers alike as well as for the future of the profession. State Street Global Advisors 8 Change the Lens, Change the Goal, Change the Game LOU MAIURI REBECCA FENDER, CFA ELSE BOS LORI HEINEL, CFA EVP, Head of Head of Future of Finance CEO Deputy Global Chief Global Markets/Global Exchange Investment Officer, CFA Institute PGGM State Street State Street Global Advisors Lori, how do you describe the trends that are redefining how institutional investors think about performance and their investment objectives? HEINEL I think there are three transformations underway. number of different client objectives that go beyond The first is moving from a short-term mindset to a returns per unit of risk. You can think of various outcomes long-term one. After all, most investors’ objectives are like income per unit of risk or inflation protection per unit long-term, whether it is saving for retirement or financing of risk. In essence, this is also what is driving the shift long-term spending plans. Managers should align from products to multi-asset solutions: a more holistic solutions to those longer horizons. Changing the lens view of what investors are trying to achieve over a longer CHANGE THE GAME to focus on the long-term has several benefits.
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