Risks on investors’ radars: PGIM survey

Yasmine Raso

Senior Journalist, Financial Newswire

16 November 2022

A new survey of institutional investors commissioned by PGIM has found the top three tail risks on their radars revolve around the rising geopolitical tensions between the U.S. and China and the performance of markets when under pressure.

The survey also showed that over 50 per cent of large institutions with $50 billion and above in assets under management (AUM) actively oversee tail risks, while only 38 per cent of institutions at other sizes do so.

Only three per cent of institutions have a tail-risk manager and less than one-third (32 per cent) have targeted risk response plans prepared.

“Too often investors are surprised by things that in retrospect were staring them in the face,” Shehriyar Antia, Head of Thematic Research for PGIM, said.

“The pandemic, the global financial crisis, the dot-com bubble — these events were all foreseeable to different degrees. Financial institutions must either gameplan for the unexpected or expect to be blindsided.”

Respondents said an unpredicted “liquidity crunch” in main capital markets including U.S. Treasuries and commodities was one of the major risks they are not necessarily prepared for, along with a potential market crash and other flow-on effects.

The survey also revealed geopolitical or military conflict related to Taiwan or the South China Sea was another key concern of institutional investors due to its great financial impact and their under-preparedness.

Given the recent data breaches on Australian soil, it came as no surprise cyberattacks were also a major concern voiced by polled investors, especially after only 30 per cent said they are prepared in the event a major attack occurs. The survey also revealed investors see this as one of the most likely tail risks to occur in the next three years.

“The best insurance against such rare and complex events is taking a long-term view and diversifying portfolios,” Antia said.

“Active managers can build portfolio strategies that will protect investors in a variety of scenarios.”

These strategies included holistic monitoring across asset classes (44 per cent), regular risk scenario analysis (41 per cent) and regular evaluation of effectiveness of risk management processes (41 per cent).