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Market & Views

The Investors Journal

Welcome to The Investors Journal.

As always, The Investors Journal continues in its quest to provide intelligent thought leadership and equally intelligent solutions to those topical global economic and investment issues that we believe matter to our global institutional investor readership.

In our latest article we explore in detail alternative options for the future of Italy’s finances and the long-term implications of a range of economic and fiscal scenarios.

We also have a guest writer Jane Fuller, former Financial Editor of the Financial Times. Jane considers whether the pendulum has swung too far towards investor short-termism, causing the capital markets not to operate at optimal efficiency and effectiveness.

Our other articles are from senior Aviva Investors investment professionals, which analyse the effect of inflation on mainstream asset classes and the asset allocation decision. The case for a global approach to investment in high yield bonds is then put under the microscope. We then move on to consider how the introduction of five key pieces of legislation will profoundly change the way that stakeholders in the real estate investment market operate. The next topic for consideration is how institutional investors should identify and quantify tail risks and implement tail risk management. We then conclude this edition with the importance of combining insight and skill with intelligent risk-budgeting when accessing fixed income returns.

As always, your views and opinions are important to us as they help in deciding upon the content of future editions of The Investors Journal, so please do not hesitate to contact us at theinvestorsjournal@avivainvestors.com

Out with the new, in with the old - German demographics and real estate

This research piece highlights the likely impact of current German demographic trends on the local real estate market in the coming years. Germany already boasts the second oldest population in the world after Japan and as Darren Sriharan- Global Real Estate Analyst explains, over the coming decades this will cause significant changes to Germany’s real estate market. These are likely to include significant upheaval to the demand for traditional real estate assets such as offices, family housing and retail which caters to lower age groups.

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Demographics & Asset Prices; no need for panic

Far from precipitating a crash in asset prices as many have predicted, the arrival of the baby-boom generation at retirement could actually push up bond prices in some mature economies. As Mirko Cardinale, Head of Strategic Asset Allocation explains, Aviva’s research suggests that the “demographic time bomb” previously thought to be awaiting global markets is more likely to be a damp squib.

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The impact of the internet on retail property

The change brought to retail by the internet revolution is accelerating with the evolution of mobile technology, online marketing and distribution systems. Customer journeys are changing as researching and ordering goods online becomes easier and cheaper and delivery options improve. Many store-based retailers are being forced to adapt their business models and property requirements, but physical retail space will remain important in these new multi-channel strategies.

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Infrastructure Investing in the UK and Continental Europe

Darren Sriharan, Global Real Estate Analyst, describes what is meant by infrastructure and summarises its key features as an asset class, identifies the opportunities within the UK and continental Europe and examines how governments intend to support infrastructure investment in the future.

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Italy’s Challenge. Is there a way out of the Debt trap?

Italy certainly faces an uphill struggle as it grapples with a mountain of public debt, stubbornly high bond yields and severe recession. Against this challenging backdrop, it is worth considering the long-term implications of a range of scenarios, highlighting what may happen to Italian debt dynamics. We look at the history of Italy’s battle with rising public debt before exploring alternative options for the future of Italy’s finances.

We find that Italy faces some difficult choices if it is to remain in the euro and meaningfully reduce the relative size of its debt. It needs a real economic growth strategy but also some structural reforms. Lowering labour costs could go a long way in boosting the competitiveness of Italian companies.

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Is Short-Termism a Problem in Investing and, if so, What Should Be Done About It?

As far as the EU is concerned, the answer to the question “Is short-termism a problem” is yes. Its green paper, The EU Corporate Governance Framework1, refers to “inappropriate short-termism among investors” as if it were universally recognised as a fact. The UK’s Department for Business, Innovation and Skills (DBIS) has a similar assumption about the viewpoint of boards of directors. Witness question one in its consultation, A Long-Term Focus for Corporate Britain2: “Do UK boards have a long-term focus – if not, why not?”

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Real Returns and Porfolio Allocation

Inflation is a major threat to the future value of any investment and, as with any risk, preparing for it is an essential part of sound portfolio management. In a previous article1 we discussed the characteristics of inflation-linked bonds and how they can be used to manage inflation risk. The purpose of this paper is to analyse the effect of inflation on mainstream asset classes, and consider approaches to asset allocation in the context of inflation.

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Extracting Value from Independent Fixed Income Alpha Teams Using Dynamic Risk Budgeting

Traditionally, institutional investors have tended to see fixed income as a choice between sovereign and credit risk, with little attention being paid to risk budgeting. However, there is a multitude of other fixed income markets from which we can actively source alpha utilising autonomous alpha generating teams with the requisite insight and skill. Moreover, when these independent sources of return are combined through intelligent risk-budgeting, together with a coherent beta replication strategy in a globally diversified fixed income portfolio, the risk-adjusted returns from fixed income can be potentially enhanced.

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Global High Yield:
Removing the Alpha Handcuffs

Investors increasingly recognise the benefits of global approaches to mainstream asset classes. High yield bonds, however, as a less-frequented asset class, are often approached on a piecemeal, regional basis. We argue that a global approach to high yield offers improved potential for diversification and clear advantages for investors seeking a wider range of alpha sources.

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