Because of continued policy challenges as well as uncertainties investors are facing, he noted, it is likely that global markets could face continued struggles in the near term.
"When thinking about macroeconomic factors like rising interest rates, continued high inflation and ongoing geopolitical issues like Ukraine, we cannot think of these in isolation because they are all connected," he said. "As an investor, we are focused on what these factors will mean for monetary policy and, more broadly how policy choices will impact markets and asset classes across the globe."
OPSEU Pension Trust manages the assets of the C$24.6 billion ($17.8 billion) Ontario Public Service Employees Union Pension Plan, Toronto.
Last year was unusual in that rising inflation and the associated rising interest rates negatively impacted diversification benefits because equities and bonds were highly correlated. "Due to the loss of diversification, investors faced challenges finding alternative diversifiers in their portfolios," he said. "At the start of 2023, however, we have observed equity-bond diversification return."
OPTrust delivered a net investment return of -2.2% in 2022, buoyed by its large allocation to illiquid assets, which partially offset losses from public market assets. Indeed, the fund's infrastructure, real estate and private equity portfolios delivered net returns of 21.1%, 15% and 4.8%, respectively, while public equity (-17.6%), commodities (-7.1%), credit (-3.5%) and multistrategy investments (-1.4%) all suffered declines.
"Illiquid asset classes like infrastructure, real estate and private equity play a vital role in our portfolio and will continue to play a key role in our strategy going forward," he stated.
Infrastructure, real estate and private equity accounted for 16.1%, 18.9% and 16.1% of total assets, respectively, at the end of 2022.
Among other alternative assets, Mr. Davis likes inflation-sensitive assets and strategies, such as commodities, which "hold greater appeal in a world where inflation volatility, and perhaps the structural level of inflation, has moved higher." Looking at 2023, Mr. Davis said that given the significant yield increase last year, fixed income as an asset class has become more attractive, while equities could still face challenges caused by uncertainties and risks in the macro and policy environment.
