Dan Kemp, Morningstar Investment Management's global investment chief, warns investors not to panic at the prospect of soaring inflation, slowing growth, and the conflict in Ukraine.
Kemp says delivering inflation-plus returns in the current environment can seem daunting because CIOs have to deliver higher nominal returns.
As he sees it, the investment chief's main task is to accept that markets are not predictable or deterministic and look for a range of possible outcomes.
"One of the great temptations is to see the thread of history as continuing into the future," he argues.
"That leads us to attach ourselves to a particular narrative. Whether it is an inflation narrative, a Ukraine narrative, or a Covid narrative, it is critical to understand that circumstances can change rapidly.
" Even though we have high inflation now, that can quickly change," he says, pushing the line that a portfolio should not be anchored to a particular view of the future.
Kemp notes that end-investors are quick to move their money to more conservative options when trouble hits the markets.
"They're are terrible timers of the market and give up significant returns that could have been additive to their goals" As the saying goes it is time in the markets not timing the markets that generates the best results."
"It is for this reason, we adopt a granular, fundamental, and valuation-driven approach to investing, acknowledging that expensive markets can provide opportunities and cheap markets may be a source of threats. In every situation, the right approach is to view the future probabilistically and think long term."
The CIO of the $265 billion asset manager continues to see opportunities in parts of global equity markets despite watching stocks suffer their worst one-day drop since 2020 when the pandemic hit.
New Morningstar research reveals that, on average, equities deliver positive real returns in all inflationary environments.
"While the nominal return target is higher, the real return target might be similar, so the challenge might be less extreme than it appears," he says, noting that investors haven't seen an inflationary environment for many years.
Farewell star managers
Kemp says the CIO role is evolving quickly and profoundly - and not just because of rate hikes and slowdown fears. It's to do with how investment heads approach the biggest challenge facing the investment industry - attracting, retaining, and developing talent in the face of a persistent skills gap.
Further, candidates are increasingly seeking out investment firms that offer professional development pathways.
It used to be that asset managers were ready to pull out their checkbooks to sign star managers and build a franchise around that manager and grow assets that way.
"We've moved on from the star manager culture as people have understood that even great investors can go through periods of underperformance," he says, adding that the rise of passive investing also weakened investor appetite for a star manager.
Now, rather than developing superstars, investment chiefs are focussed on bringing people in at the start of their careers and training them to accelerate quickly through the organisation and contribute to the team's overall performance.
"So, that's changed quite a bit."
Quants and codes
Meeting the challenges of an evolving inflation outlook has signaled a heightened need for technology skills. Investing has become more quantitatively driven as funds seek new technical ways to build portfolios and drive solid investment returns.
Kemp's team maintains valuation models of more than 300 asset classes and groups which underlines his view that the CIO skills set must include an understanding of quant techniques.
"CIOs should get their teams to be thinking in terms of code rather than spreadsheets", he says, adding that coding is the skill set of the future, and training is mandatory.
"We also ensure that team members and investors pass a CBAT (computer-based aptitude test) to create better decisions and ultimately better returns."
According to Kemp, the new CIO should be obsessed with the way people make decisions. "That is the core of the investment process, so I think the 'new' CIO is much more interested in creating good decision-making structures."
While funds are responding to these challenges by creating new roles and bringing in highly technical staff, there is also a focus on broadening the talent pool, according to Kemp.
"Cognitive diversity and inclusivity are key to developing an investment team.
"Improving decision-making demands that we work again against groupthink which can so easily take hold."
The advice gap
The UK-based CIO, believes that, unlike Australia, the UK does not have a mega superfund structure, although the local authority pools are starting to amalgamate.
Kemp thinks the market is more atomised there, and people have far more choice over where to invest their pensions.
The CIO says internalisation and the move to passive investing have pushed the asset management industry towards retail and wholesale clients who work closely with financial advisers.
He believes the opportunities for the local wholesale market are enormous, particularly given the mismatch between the number of advisers and the number of people seeking advice.
With the retirement phase of the superannuation about to take off, Kemp predicts that adviser numbers will climb as advice is a highly qualified and technical profession.
"Where capacity is constrained, the increased demand will lead to a supply response as it did in the UK," he says.
Kemp expects that to happen in Australia once the industry recovers from the hump of recent regulatory changes and higher educational demands Kemp points to the popularity of goals-based financial planning and goals-based investing in Australia and claims that the country is ahead of the UK here.
"The sooner we all move away from this obsession with the short-term past performance - which we can't do anything about - and instead focus on investors reaching their goals, the better it will be for all markets."