Dr Raphael Arndt
Chief Investment Officer
Dr Raphael Arndt's contribution to Milken Institute's #Powerofideas essay series exploring the unique challenges, opportunities for growth, and collaborative responses associated with the COVID-19 pandemic. The complete COVID-19 Power of Ideas Collection is available at www.milkeninstitute.org/power-of-ideas/covid-19.
We are living through a 1-in-100 year event in markets and the real economy, compounded by a significant public health event that is changing how society operates and profoundly impacting how we live and work.
Australia has done well in managing the health impact of the pandemic so far. The economic impact domestically has been significant. As a global investor, we, like all investors, are seeking to understand the extent of the global impact on business and economies and how that might shape our portfolio going forward. We are also considering the impact on societies around the world, how they are responding to the pandemic, and the potentially lasting changes in policy and regulation.
Across the globe, we have seen unprecedented stimulus measures introduced, and debt levels have increased. Economic activity has fallen, and unemployment rates are up.
There are clear economic impacts for investors to reckon with. Where will future growth come from? How might this reshape the relative economic importance of, for example, the US, Europe, and China? Will we see a rise in protectionism as countries seek to rebuild their economies and shut out foreign companies and investments? Will we see changes to the economic model, including the extent to which governments are involved in markets, and an increase in regulation as economies recover?
One thing we can be sure of is that the world is changing, and investors need to respond. As we navigate the investment challenges and opportunities the pandemic will throw at us, there are four key themes I believe investors will contend with:
The Future Fund invests for the benefit of future generations of Australians. An important feature of the history and context of our organization is the powerful sense of purpose that is engrained within it. Our people come to work each day, knowing they will have a direct impact on the well-being and prospects of Australians for generations to come.
The pandemic reinforces a shift that has been growing over recent times for organizations to put greater focus on their purpose. Clarity of purpose drives organizations to address misalignments and frictions that can grow in the investment value chain and to find ways to turn risk into return as efficiently as possible.
Adapting to change
I have been saying for some time that, due to demographics and technological change, the future will look different to the past and that the successful companies of yesterday won’t be the successful companies of tomorrow. This event just highlights that, as investors and leaders in society, we need to be able to respond as the world changes.
The investment industry itself continues to change. The increasing sophistication of institutional investors has led to a growing level of competition for attractive investment opportunities. Everyone is working harder to try to produce their desired returns.
In the past, investment managers could buy almost any company, add some leverage, and sell it on in a few years’ time at a comfortable profit. Today’s market requires them to seek every opportunity to add value at every stage through the life cycle of the investment. Those allocating capital like the Future Fund must continue to innovate and be open to the changing world we live in and the changing investment environment we operate in.
Significant financial pressures on sectors and communities have seen politicians and regulators respond. Investors need to understand the changed context, that risks may be different, and that the balance of returns and risks may have shifted.
We have seen a massive forced shift to remote working. While this was out of necessity as social distancing measures were introduced across the world, it may change the game going forward. We have learned new ways of working. More remote working and greater flexibility offer the potential to really address diversity and gender balance in the investment industry. This is an opportunity we should harness.
The health and economic impact of COVID-19 continues to unfold, and it is too early to say what the future looks like. It will depend on the extent to which the health and economic policy responses are successful. We are seeing the move to new ways of working and an acceleration of changes that were already underway due to demographics and technology. Overall, recent events reinforce the need for the finance and investment industry to really understand its purpose and be open-minded to change and adapt as necessary.