Institutional investors are not ready for the next 'black swan' event

Study finds that large investors across multiple countries fear what may happen but are ill-prepared

Institutional investors are not ready for the next 'black swan' event
Steve Randall

Unpredictable and widespread events that impact the stock market may not be common, but the risk is always present.

The dangers of a so-called ‘black swan’ event are well-known – and feared – among institutional investors who stand to lose substantial amounts, but are they prepared?

Not according to an international survey by PGIM, the global asset management business of Prudential Financial Inc.

Polling of more than 400 senior investment managers across Australia, China, Germany, Japan, the UK and the US with combined assets under management of more than $12 trillion, found several concerns.

These wealth professionals are most concerned about US-China relations, market function in times of stress, and the dependence on technology within financial markets.

But despite knowing the potential tail risks, just 38% of respondents said they actively monitor them and less than a third have specific risk response plans.

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

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Potential ‘black swans’

Among the scenarios that the asset managers fear the most are a major liquidity crunch in major markets, especially in a traditional safe haven such as US Treasuries.

Military action involving China and Taiwan is the second-highest tail risk among respondents, but also the one they feel least prepared for despite the expected impact on financial markets.

A devastating cyber attack on a major financial platform or government agency for a significant time is a top-three risk but only 30% of respondents say they are prepared to respond.

Being prepared

There are key things that PGIM says investors can do to mitigate the risks from a rare black swan.

These include constant monitoring leverage, collateral arrangements, and liquidity positions through the shocks; and stress testing.

“The best insurance against such rare and complex events is taking a long-term view and diversifying portfolios,” advised Antia. “Active managers can build portfolio strategies that will protect investors in a variety of scenarios.”