The UK might have officially crawled out of recession in October but that will have come as little relief to institutional investors juggling the macro-economic rollercoaster ride of the eurozone debt crisis with the looming threat of the US tipping over the edge of a ‘fiscal cliff’. Indeed, 83% of delegates at Schroders’ recent UK institutional conference believed there is a risk that the UK could fall back into recession in 2013.
“Strategies with income, visibility of income and sustainability of income were at the heart of 2012.”
Andy Green
All this has caused global markets to swing wildly between risk-on and risk-off while volatility has continued to drive investors’ thinking on portfolio construction and asset allocation. Investors and their advisers therefore had to be on top of their game to reap any reward in this environment.
The investment story for defined benefit (DB) pension funds over the past year has been one of seeking growth and on the asset side, while with UK gilts and global sovereign bonds yielding at historic lows they have had to think of innovative ways to structure portfolios to best meet liabilities. All this has come against a backdrop of quantitative easing (QE) which has further suppressed gilt yields and pushed up scheme liabilities. Certain equity markets have shown signs of promise, while investors have continually looked to alternative strategies to claw back some of the shortfall in their portfolios.
In addition, investors have increasingly taken up liability driven investment (LDI) in an attempt to hedge against inflation and interest rate risk and better match their liability profiles.
So in a year when volatility was rife and liabilities soared, what were 2012’s main investment themes and surprises? And what does 2013 have in store? portfolio institutional assembled a panel of leading investment consultants to reflect on the past year and predict the main investment themes investors need to think about for the year ahead.
What were 2012’s main investment themes?
Belgrove: Coming into 2012 the eurozone debt crisis dominated global investor concerns (and it is still a major concern for investors today) while Central Bank and other interventionist action provided regular support or relief leading to another pattern of rollercoaster markets – risk-on/risk-off. Sustainable economic growth remains elusive and these are particularly challenging conditions for long-term investors to act decisively.
From the perspective of underfunded UK DB pension schemes the “3D” strategic themes hold true on average – de-risking, diversification and dynamism. In these conditions dynamism (acting nimbly) matters and many trustee governance structures face challenges.
Drewienkiewicz: So far 2012 has been dominated by a risk-on theme. Equities have delivered good returns, particularly in the US, as investors have become more confident in the continued existence of the eurozone, while liquid and semi-liquid credit markets have experienced a strong rally. It has been interesting to see the extent to which unsecured but more liquid opportunities such as high yield debt have rallied through the spreads offered by secured bank loans, which now arguably offer far superior risk-adjusted returns. Of course, it still remains to be seen whether markets will cope with the uncertainty that looks likely to be delivered by the US fiscal cliff issue which awaits the President after his recent re-election.
Green: In short, income. Strategies with income, visibility of income, and sustainability of income were at the heart of 2012.
Kirton: With safe haven sovereign bonds at extreme low yields, we have helped clients build risk reducing portfolios of alternative bond and ‘bond substitute’ assets.
With economic growth scarce on the ground we have hunted for growth assets, particularly in emerging markets, and encouraged clients to behave dynamically and innovatively. Emerging market debt, absolute and multi-strategy products and low volatility/ quality equity plays have proved rewarding.
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