Niels Jensen, the CIO of Absolute Return Partners, outlines six mega-trends which he believes will devastate the performance of passive investing over the next decade. While the timing is difficult to predict, the trends are inevitabilities that will require significant tweaks to long term portfolio construction. Filmed April 19, 2018 in Twickenham, England.
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The Mega-Trend Threats To Passive Investing (w/ Niels Jenson) | Expert View | Real Vision™
Beta risk is the one risk factor you don't want to be overly exposed to in this kind of environment. The reason GDP growth is so slow, the reason productivity growth is so slow at the moment, is because we are at the end of a debt super cycle. I know you would like to ask me the question how could I be wrong. But I can guarantee you that these mega-trends will unfold.
I'm a Danish National. Came home to my wife one spring day in 1986. I said to her, would you like to move to London? I've been offered a very interesting job. That's now 31 years ago. So we have now spent-- we are, for all intents and purposes, British nationals, but obviously with strong Danish roots. I have work mostly for American investment banks.
I worked for Goldman Sachs for many years. I ended up at Lehman Brothers, heading up the private wealth management division in Europe. Then in 2002 I decided to start my own business, which is now into 17, 18 years. That business was mostly in multi-family office business, but gradually-- especially after the financial crisis in 2008-- we have increasingly become institutional. And today the biggest client base for our business today is the UK corporates pension fund base.
The end game could unfold in a number of different ways. But let me back up before we get to the end game. Let me explain why I think the world has changed quite dramatically in recent years. The typical investor today doesn't really care about the long-term. For most investors, long-term means next Monday morning and not next year or the year after.
And therefore, some of the longer term structural trends that I have focused on in my book are being largely ignored and neglected by investors. And that's actually an opportunity set for those investors who are prepared to dig a little bit deeper and prepared to structure their portfolio according to what is going to unfold over the next 10, 20, 30 years.
The end game can unfold in a number of different ways. If you go back to one of the six structured mega-trends that I discussed in the book, it's what I call the end of the debt super cycle. The last debt super cycle ended in the 1940s-- late '30s, early '40s. And that basically reset the clock. Debt to GDP has been rising constantly since 1946. And I'm arguing in my book that we are now approaching the end of the current debt super cycle.
If you go back in history to 300, 400 years, you can find a number of debt super cycles. It's not an unknown phenomenon. We typically build up debt, something happens, everything collapses, and we start all over again. And that's precisely what we are at now. We are at the tail end of the current debt super cycle. That, combined with a number of other factors, will potentially end up in what I call the perfect storm-- a prolonged period of low GDP growth, low returns on equities. And for that reason investors need to think fundamentally differently in terms of how they structure their portfolios for many years to come.
The way I structure portfolios, first of all, it is quite different from the way most people do it. Most people think of portfolio construction as how much do I allocate to equities, how much to allocate to bonds. They think of asset classes when they talk to their portfolios. I don't think of asset classes. I think of risk pockets.