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2021 outlook Dark tunnel. Bright light.
Viewpoints from the Global Investment CommitteeMacro risks associated with the devastating coronavirus have loomed over global markets and economies for nearly a year, and will continue for at least several months. But beyond this dark tunnel, we see a more normalized environment driven by fundamentals. Nuveen’s Global Investment Committee offers ways to navigate through the near-term challenges and position for the bright opportunities on the other side.
More from the Global Investment Committee
- Views from the TIAA General Account
- Dark tunnel. Bright light.
- Asset class outlooks
- Five portfolio construction views
Nick Liolis, TIAA General Account
Views from the TIAA General Account
Income and inflation: Play to your strengths
For years, investors of all stripes, from the world’s largest institutions to individuals, have focused on the risk of persistently low interest rates and the struggle to achieve income. But there’s another potential risk on the horizon — with similarly damaging effects — that also demands focus: prospects for rising inflation and the erosion of purchasing power.
Inflation risks have been a point of discussion among investors for some time, yet they haven’t materialized. But it does feel different now: Nuveen’s Global Investment Committee believes that the extraordinarily easy monetary policy and expansive fiscal policy we have seen over the past year (and more spending to come) will likely increase inflation risks. We don’t expect inflation to rise tomorrow. But when virtually every global policymaker is using every tool available (with more force than during the global financial crisis) to accelerate economic activity, the probability of significant inflation risk is rising.
Inflation affects all investors, but the problem can be particularly acute for the TIAA General Account (GA) and other institutions that are ultimately responsible for helping people fund their retirement. After all, inflation erodes the purchasing power of the income we pay to our participants. Because the GA is part of a U.S.-based insurance company, regulations require us to hold significant amounts of fixed income investments — and bonds are an asset class that can be hurt by rising inflation.
This leads us to the issue of portfolio construction in the current environment. Every investor has their particular risk tolerances, restrictions and goals, but we all also have our strengths. Investors should play to those strengths to manage their risks, including inflation. For the GA, two of our main strengths are our capital strength and ample current liquidity. Regular stress tests ensure our portfolio has more than enough liquidity to meet our spending needs, which allows us to invest a significant percentage of our overall assets into more illiquid private investments such as real estate and a variety of real assets including agriculture, timber, farmland and infrastructure. These investments have the dual advantage of providing solid yields in today’s low inflation environment while also offering the potential of a natural inflation hedge.
Other investors will of course have varying strengths and risk tolerances. Traditional pension plans or individuals with less investment restrictions and higher risk tolerances often consider public equities or commodities to manage their inflation risks. Large institutional investors willing to invest globally could also benefit from the various rate differentials created by differing inflation expectations between countries around the world.
One final takeaway: It’s important to avoid positioning for any one outcome, but rather construct a resilient portfolio designed for all economic scenarios. Sometimes that might mean sacrificing some returns to manage different risks, but ultimately it means playing to your strengths and taking on the risks you can afford in order to meet your return objectives.
As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.
All market and economic data from Bloomberg, FactSet and Morningstar.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Nuveen provides investment advisory services through its investment specialists.