Asset managers turn to geopolitical risk experts to help navigate markets
As global political tensions rise, asset managers increasingly look to geopolitical experts to help them make sense of a rapidly changing money management landscape.
Some of the experts are in-house geopolitical strategists and macroeconomists, while others are former military personnel or diplomats serving as consultants. All are on call to provide portfolio managers, asset management executives and sometimes even firm clients expert advice as they decide how and where to invest money or expand operations.
Their expert services are in high demand as asset managers grapple with the Israel-Hamas war and its potential for escalation, the possibility of Iran joining the conflict, the ongoing war in Ukraine, and the ups and downs of U.S.-China tensions.
"Four years ago, I didn't have one geopolitical expert in my network," said Bryant VanCronkhite, a senior portfolio manager at Allspring Global Investments and co-team leader of the firm's special global equity team. "I now have three firms that I talk to on a regular basis that cover strictly geopolitical topics and understand what's happening and what could happen in the future."
The investment industry hasn't had enough of a focus on geopolitics for a long time, VanCronkhite said.
"Certainly, the industry has a core competency in global economics and monetary policy, but an appreciation for political and military policy is deficient relative to the significance it has on the markets today," he said.
The geopolitical experts in Allspring's Rolodex — whom VanCronkhite did not identify but described as "former military and political service members" — help educate the firm's decision-makers about global events and help measure the "level, likelihood and impact of risks around the globe."
Allspring had $485 billion in assets under management as of June 30.
Another firm that has been open about its new relationships with geopolitical experts is London-based Schroders, which had $885.1 billion in assets under management as of Sept. 30.
Schroders CEO Peter Harrison said his firm had added to its payroll several geopolitical consultants — including the illustrious Gen. Nicholas Carter, who led the British army from 2014 until his retirement in 2021, and Sebastian Wood, former British ambassador to China.
These two experts are on tap to explain to Schroders' portfolio managers "how you manage uncertainty, how you manage war, how war unfolds," Harrison said. "In terms of thinking through what happened with Russia, it was really helpful."
Carter's insights into the changing world order are also made available to the firm's institutional clients on occasion at various events Carter attends as a guest speaker, Harrison said.
IN-HOUSE AND EXTERNAL
Some firms, like Boston-based manager Wellington Management, have internal experts on the payroll instead of employing outside geopolitical consultants.
Thomas Mucha, a former journalist turned macroeconomist, has been Wellington's in-house geopolitical strategist since 2015. Mucha is part of the firm's 20-person global macroeconomics team, which helps Wellington's executives and staff make sense of ever-shifting geopolitical developments and risk.
Mucha's insights come from his long career as an international journalist as well as his education in economics and the "daily conversations" he has with policymakers around the world — what he calls the "meat and potatoes" of his role at Wellington, which has over $1 trillion in assets under management.
"I'm having daily interactions with portfolio managers and analysts across equities, fixed income, alternative strategies, even our private equity investors, plus commodity analysts, currency analysts — just about every other investment strategy at Wellington that's trying to make sense of this," Mucha said of his internal role at Wellington.
Mucha also has an external role providing advice to the firm's "biggest and most strategic clients all around the world … trying to help them figure out the world, too, and how to allocate capital in more productive ways, trying to help them see the broader set of potential outcomes."
Though Mucha credits Wellington for being "way ahead of the curve" in considering the implications of geopolitics on the markets, his advice has been more sought after as global tensions began to rise.
"As the world has gotten more complex, more dangerous, more unpredictable — and as we've seen more conflicts around the world escalate — the pace and interest level around these topics has gone up," Mucha said. "Inside of Wellington, but externally as well."
A DISORIENTING WORLD
Some former in-house experts, like Christopher Smart — who until July was chief global strategist at Barings — have struck out on their own. Smart now provides his geopolitical analysis to a variety of financial firms and corporate clients through his own consulting firm, Arbroath Group. A representative for Barings declined to comment on whether the firm has replaced Smart.
While Smart said that geopolitical risk had always been a concern for investors — he used the financing of bonds during the Napoleonic wars as an example — he allowed that, in recent years, advice has been in higher demand.
"There's been a sense in the last, maybe, five years that the post-Cold War order, to the extent that we had one, is rapidly coming unraveled," Smart said. "The world is a very disorienting place right now."
Marko Papic, a partner and chief strategist at the investment advisory firm Clocktower Group, said his geopolitical analysis skills have been more sought after in the current, destabilized world than they were when he entered finance in 2011.
"I would walk into offices, and they'd look like I had three heads," Papic recalled. He said the demand for his advice and analytical skills has skyrocketed since 2016 — when the UK voted to leave the European Union and Donald Trump was elected president — which he called the "inflection point" for investors to understand the importance of geopolitics.
What, exactly, geopolitical analysts are providing to their clients depends on the consultants themselves.
Smart likens his services to a "highly tailored weather report" for financial institutions and companies that are either locked into doing business in countries with high geopolitical tension, like Russia and China, or are considering expanding operations there.
"If you know you're going hiking along a certain trail, and you have to make that hike no matter what, you want to know if it's going to be hot and sunny or cold and wet," Smart said. "As much situational awareness as you can possibly have helps you reduce the risks in any decision you may have to make."
Papic also provides research and tailored analysis for his institutional clients, based on his personal methodology for understanding geopolitics he developed while working in private intelligence before joining the financial industry.
Papic argued that a rigorous, methodological approach to analysis is more useful to his clients than advice from former government officials.
"You need people who speak both languages [geopolitics and finance] at a very high level to actually add value," Papic said. "Pulling someone out of government after 30 years and trying to tell them, 'Hey, can you learn the Bloomberg terminal?' Yeah, good luck with that. I'm very skeptical of the supply [of consultants]."
Even pension funds that don't currently use geopolitical consultants said it's a space they're paying close attention to as the world continues to change.
"We are looking into this because of the two wars going on," said Steven Meier, CIO of the $255 billion New York City Retirement Systems.
"The issue of geopolitical risk needs to be considered over the next 10 years. It's hard to price. It's the unknowns we don't know that we need to be concerned about."
Said Angela Miller-May, CIO of the $49 billion Illinois Municipal Retirement Fund: "We're a global investor. We have exposure to countries outside the U.S. We have to look at these exposures now as risk. Do we look at a portfolio ex-China? Or as China's the next largest economy do we keep some" in the portfolio, she said. Geopolitical risk "is something we think about from an investment point of view and macroeconomic point of view."
Pension plans and asset managers are preparing for deglobalization and continued conflict, which they are concerned will affect global supply chains and maintain an inflationary impact on the world economy.
"It's not as if everybody is going to pull down their blinds and make everything in-house, but there will be both a greater sense of needing to have a couple of different backup supply lines and maybe even deeper inventories," Smart said. "In this reorientation of trade routes and supply lines, there's a lot more need to understand what geographies make the most sense, and that's when a lot of the geopolitical questions arise."
Mucha said his job as a geopolitical strategist was to help Wellington and its clients invest in the world that exists, "not the world you wish we live in," which means acknowledging that issues like great power competition and climate change aren't going to simply disappear.
"Geopolitical and policy risk is likely to be highly disruptive in coming years. I think that's going to mean greater differentiation from an investment perspective," Mucha said. "It's time to find winners and losers, to seek alpha in a more disruptive, more differentiated environment."