T. Rowe Price execs share a bird’s eye view of the institutional landscape
2025 could be rife with opportunities. Some analysts have already suggested it could be among the strongest performing year of the last decade. Zaheed Jiwani and Matthew Ko of T. Rowe Price also believe there’s a full slate of opportunities and trends for institutional investors this year.
Despite strong returns across asset classes in 2024and the risk of high valuations in certain equities, Jiwani, vice president, Institutional business at T. Rowe Price and Ko, a portfolio specialist in T. Rowe’s Multi-Asset Division, remain optimistic, citing a select few key trends and concerns for the year ahead.
More allocations to private debt
For one, Jiwani notes there’s been significant demand and interest from institutional investors to allocate more to alternatives, particularly within private credit or private debt strategies.
“Institutional investors that have already allocated are looking to allocate more,” says Jiwani. “Many that have been thinking about it are now in that search process, or they've come out in an asset liability study, and they're looking to allocate to this asset process that they've heard a lot about and are trying to figure out where [in the portfolio] their allocations are coming from.”
Jiwani explains that these allocations will pull from both the equity and fixed income sides of institutional portfolios. He explains that institutional investors are willing to pull from those traditional portfolio mainstays because of healthy funding levels and a need to diversify. Because private credit is a somewhat novel space for some institutions, there is also demand for strong credit teams and active management in this space.
“Canadian institutions are just conservative by nature,” Jiwani explains. “You want to make sure you’ve got really strong active management, really strong research, and an understanding of both the risks and opportunities that are there with those deeper teams.”
Outside of appetites forprivate credit, there are some other notable trends in alternatives. Jiwani and Ko note there’s been a shift away from commercial real estate, particularly domestic commercial real estate and into other assets like infrastructure and private equity or private debt.
Global multi-sector fixed income strategies
The theme of diversification emerges again in traditional fixed income. Ko and Jiwani explain that institutional investors are moving away from a heavy reliance on domestic fixed income, such as Canadian bonds. There is now a growing interest in global multi-asset credit and multi-sector fixed income strategies to diversify risk, explains Jiwani. Some investors are even shifting core fixed income allocations from passive to active management to free up resources for more active, diversified strategies. This diversification reduces risk while maintaining returns, allowing plans to tap into more global opportunities.
“It’s sort of that win/win situation that a lot of plans are seeing now that they're open to and being further educated on this. It's also the hiring managers that have the capability to go int different regions and different sectors and really explore that,” notes Jiwani.
A reduction in home country bias
Equities, too, are seeing a shift in investor preferences, with a notable reduction in home country bias. While this has been a long-time secular trend, it’s one that has become “much more extreme," says Jiwani. “It’s to a point where most large allocators don't have one or are removing a dedicated Canadian equity allocation. They're recognizing that their domestic allocation will come through their fixed income side.”
Ko explains that home country bias is a common phenomenon around the world and not just in Canada, Japanese investors, for example, also exhibit a strong home country bias. However, he notes that the home country bias has benefited investors willing to look more globally — and specifically at the US, as they have been able to capitalize on the strong performance of large US tech companies.
He also highlights how changing valuations and macroeconomic expectations are shaping investor behaviour. “Canadian equities have actually had a really good year,” Ko says. “Expectations are up for economic growth in the coming years, so equities are jumping ahead of that.” However, Ko is quick to point out that valuations are stretched. “Perhaps lock in those gains and get maybe more of a guaranteed source of return.”
Global economic uncertainty
Unsurprisingly, tariff concerns are top of mind for institutional strategies. While Ko highlights the unpredictability of the Trump administration's trade policy, he asserts that in the past, "the threats were larger than the actual implementation of tariffs.” Even though it’s uncertain whether the second Trump administration will follow a similar playbook or take a different approach, Ko estimates that the imposition of such tariffs could have a negative 5 per cent GDP hit on the Canadian economy, which he describes as a "very large amount" with no easy offsets.
“Canada trades more with the US than it does even amongst its own provinces so this is going to be a serious impact, but the retaliatory sort of tariffs or other threats from Canada will likely cause the administration of Trump administration to maybe reconsider how forceful they want to be with tariffs, or if they want to be more selective,” says Ko. Should tariffs be imposed, however, he suggests that there would likely be a "flight to safety" in the markets, with investors potentially favoring US bonds or gold as traditional “safe haven” assets.
“The real concern the Canadian markets will have to deal with is higher inflation, which is then going to impact the Central Bank's odds of cutting rates and supporting local markets, as well as financial assets,” says Ko. “Inflationary environments are good for commodity producers, which is going to directly impact parts of the Canadian markets.”
