Volatility is driving investors to rethink geographic and asset mix: Schroders

Canadian institutional investors are showing signs of strategic recalibration as market volatility and geopolitical uncertainty continue to shift and unsettle the global investment landscape, recent findings from Schroders has found.

Michelle Skelly, head of Canada at Schroders, said that while the country’s largest pension plans remain largely unshaken, others downstream, like corporate pension plans, endowments, and foundations are showing more anxiety in their asset allocation decisions.

“In the last couple of years, we've seen people get very rattled when equity markets drop and then you had this denominator effect where you had to match your liabilities,” she noted. “Canadian pension plans have been over funded and well funded; they're kind of the gold standard when you're looking at investing in general. I don't think they're too rattled.”

The response, Skelly suggests, is linked to resource constraints. Without deep internal teams or robust consulting support, investors are more susceptible to shifts in sentiment, especially during periods of market stress.

Yet even the most stable allocators are keeping risk in check.

“There’s definitely a sentiment of de-risking and people looking at income and stability,” she noted, adding others, particularly among family offices, are seeing volatility as an opportunity and seeing “how we can capitalize on this,” pointing to “a tremendous amount of global equity searches and emerging markets.”

While Schroders continues to see growing interest in global and emerging market equities, Skelly highlighted a clear uptick in private equity demand. What's notable, she adds, is that some pension plans are only now making their first forays into the asset class.

She attributes part of this shift to the growing accessibility of private assets, particularly through the emergence of semi-liquid and evergreen fund structures. These vehicles are drawing attention from the wealth channel, which have traditionally been locked out of such strategies, explained Skelly.

The secondary market has also seen sustained interest following a surge in activity last year, a trend Skelly believes is still playing out.

Private debt continues to dominate allocation conversations, though the approach is evolving. In Canada, the market has historically centered on direct lending, but institutional investors are now expanding into more diversified segments, including asset-based finance, securitized credit, and infrastructure debt.

Real estate, too, is getting a closer look, notably outside Canada. Skelly said some pension funds are reassessing their domestic real estate exposure, which has become overly concentrated.

“They have historically doubled down on real estate that has become a little too much,” she said. “They’re looking at European real estate in pockets like student housing and logistics where valuations are looking attractive,” she said, adding that interest is also driving Canadian institutions to establish overseas offices, particularly in London, to gain local expertise.

Skelly also sees a shift in how institutional investors view fixed income, which has traditionally been seen as a low-risk anchor in portfolios, acknowledging persistent rate volatility and market instability.

In response, she emphasized that many allocators are turning toward private debt as a more stable income-generating alternative. These investors are looking to minimize exposure to public market swings while still capturing yield premiums available in private markets.

Skelly said this move extends beyond traditional direct lending.

“When I say private debt, I don’t just mean securitized, but rather credit alternatives like insurance-linked securities. Things that are uncorrelated with the market,” she noted.

For institutions managing long-term liabilities, diversification across these niche credit strategies is seen as a practical form of downside protection.

Asked how investors are preparing for volatility in the next year, Skelly underscored a broadening of exposures, both by market cap and geography, noting there's been a clear move toward small-cap, all-cap, and emerging market strategies and areas where active managers can uncover less obvious growth opportunities, particularly as US equities this year alone has made a strong case for diversification.

“In Canada, typically, it's always been global equities. It hasn't really been US or international equities; it's always been one pot. In the last two or three years, we've seen a lot of people coming to us saying, ‘International equities,’” said Skelly.

“Maybe they have a passive approach but it's just interesting that they're now carving out international from the US. I think that puts to the whole point of worries around performance, concentration, risk and the volatility. I don't think that people are going to necessarily double down on the US, but I don't think they're going to ignore the US. That’s just something I think they need to manage and you can only manage that volatility by putting in a little bit more exposure elsewhere geographically.”

However, volatility can present opportunity. It forces a closer look at undervalued or overlooked segments of the market, which is why many asset managers stay constantly engaged in market analysis, emphasized Skelly.

While market volatility can affect performance, institutional investors are generally less reactive than their retail counterparts, acknowledged Skelly, adding that long-term investment horizons allow institutions to remain steady even in turbulent periods.

She added that while downside protection is always built into institutional portfolios - via cash, bonds or other hedges - allocators also adjust their risk appetite based on broader conditions.

“The risk profile changes and people will dial up their risk or they'll dial it down,” she said.

Overall, she emphasized that many investors are better off not overreacting to short-term swings.

“If you were better off just like leaving things alone, you would have ridden the waves and come out on the other side,” she said.