Global
Perspectives
2021

Solutions in 2021:
adapting to a new normal
Lorenzo Garcia, Head of Investment Solutions, EMEA and APAC
 In unprecedented times, clients are struggling to buildwell-diversified portfolios, as well as grappling withthe rising cost of guarantees and management of very
expensive liabilities. After depending on fixed income
diversification for decades, they must find new ways tohedge their exposures while growing assets.
 Asset classes such as infrastructure, private equity

and real estate deliver the required combination ofdiversification and yield. But they bring challenges of theirown because they are illiquid, with lock-up periods, so dolend themselves less than other asset classes to dynamic
asset allocation. It is an interesting conundrum and one
we have to be mindful of when building long-term
investment portfolios.

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 Clients are seeking high-quality credit portfolios that areless likely to experience defaults in next year’s economic
fallout. Our research-intensive approach is at the centre of
doing this and allows us to build portfolios with quality bias
and only intended exposures.
 Ageing and increased longevity of populations are also

putting retirement planning under the spotlight. In 2018,
for the first time in history the number of people over theage of 65 outnumbered children under five, according tothe United Nations. By 2050 there will be twice as many
over-65s as under-fives.

Global Perspectives 2021 | Solutions in 2021: adapting to a new normal | Lorenzo Garcia, Head of Investment Solutions, EMEA and APAC

What kind of customised solutions are our institutional and sub-advisory clients looking for in today’s yield-starved, default-conscious
and ageing world? With developed world government bond yields as low as ever before seen, the traditional diversification into fixedincome duration and credit is no longer so effective.
In our experience there is a growing appetite for alternative approaches
in building long-term investment portfolios including dynamic strategic
asset allocation, which is actively adjusted to a range of market statesand searching for further diversification in portfolios by using alternative
asset classes. Spurred by a sharp rise in government and corporate
borrowing as the Covid-19 pandemic wears on, the global debt load stands
at a record high,1 even greater than in the 2009 aftermath of the global
financial crisis. When the pandemic is finally over, we appear likely toemerge into a world of low inflation and low growth, where interest rates
remain lower for even longer than was previously expected, and corporate
defaults could rise.

The need for well-diversified strategic portfolios
In these unprecedented times, clients are struggling to build welldiversified portfolios, as well as grappling with the rising cost ofguarantees and management of very expensive liabilities. After depending
on fixed income diversification for decades, they must find new ways tohedge their exposures while growing assets. How can we create strategic
portfolios that replicate the diversification historically provided by fixedincome when yields were higher?
Asset classes such as infrastructure, private equity and real estatedeliver the required combination of diversification and yield. But they bringchallenges of their own because they are illiquid, with lock-up periods,

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so do lend themselves less than other asset classes to dynamic asset
allocation. It is an interesting conundrum and one we have to be mindfulof when building long-term investment portfolios.

Asset classes such as infrastructure, private equity and real estatedeliver the required combination of diversification and yield... but bringchallenges of their own
As previously mentioned, taking a dynamic approach to asset allocation
is an increasingly popular approach. This involves using signals to identify
a range of market states – for instance, bearish, neutral, bullish andhighly bullish – and actively dialling risk in a strategic portfolio up or down.
Portfolios can be quickly switched to pre-determined allocations designed
for each of these states using liquid instruments.

The need for customised quality credit
A lot of our clients are wary that 2020’s severe recessions will translate
into credit defaults in 2021/22 when government support for the economy
is withdrawn. China is already feeling the credit consequences of Covid-19.
As its government has withdrawn the support it provided to state-owned
entities, so there has been a wave of bond defaults. Europe and the US
are later in the Covid-19 cycle than Asia, and there is a danger they may
face similar credit risks at some point.

Global debt increased by US$15 trillion in the first three quarters of 2020 and now stands above US$272 trillion; Attack of the Debt Tsunami; Global Debt Monitor; Institute of International Finance.

Global Perspectives 2021 | Solutions in 2021: adapting to a new normal | Lorenzo Garcia, Head of Investment Solutions, EMEA and APAC

Those of our clients investing in multi-asset or credit portfolios arekeenly aware of such risk. Consequently, they are seeking high-quality
credit portfolios that are less likely to experience defaults in next year’s
economic fallout. Our research-intensive approach is at the centre ofthese portfolios and allows us to build portfolios with quality bias andonly intended exposures.

Demographics and regulatory pressures
Beyond these immediate issues, ageing and increased longevity of
populations are putting retirement planning under the spotlight. In 2018,
for the first time in history the number of people over the age of 65
outnumbered children under five, according to the United Nations.2
By 2050 there will be twice as many over-65s as under-fives.

Our research-intensive approach allows us tobuild portfolios with quality bias and only intended
exposures
Insurers and advisory clients face this issue when delivering investment
or guarantee solutions to their clients. This, together with the emerging
challenge of growing regulations as well as the introduction of two
new accounting standards (IFRS 9, financial instruments; and IFRS 17,
insurance contracts), forces firms to rethink how they match assets andliabilities and approach product development in 2021, and therefore how
they construct well-diversified and capital-aware portfolios.

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United Nations. World Population Prospects 2019. https://population.un.org/wpp/Publications/Files/WPP2019_Highlights.pdf

Conclusion
In 2021 and beyond, investors will react to the challenges they arefacing by taking new approaches to managing investments and liabilities.
Many will worry about growing regulatory pressures, ageing clients or
the lack of diversification in investment portfolios. Either way, building
diversified, informed and well-scaled dynamic strategic portfolios is amust in 2021 due to the inability to rely on fixed income to diversify riskin portfolios, the growing risks of defaults and the low interest rates
environment. Our clients will also build portfolios which include responsible
investment considerations, reflecting their beliefs as well as the broader
trend in the industry. Doing so will allow them to adapt to an exceptionallychallenging world of low fixed income yields, mounting regulation and lackof diversification.

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Issued 12.20 | Valid to 06.21 | J31065 | 3372471