By Ciaran Barr
Asset owners always face uncertainty: in effect, investing is an attempt to peer into the future. However, the current economic and financial environment is perhaps in the top quartile of uncertainty.
Interest rates are testing new lows (some $10trn or so of bonds now have negative yields), but are having limited impact and central banks are considering ‘helicopter money’ or direct financial injections. Low interest rates and QE have aided financial markets but less so the real economy, and they have increased some measures of asset owners’ liabilities. Returns to risk-seeking assets in recent years have been strong, but it is unclear whether this will continue or whether it represents the bringing forward of future years’ returns. We can be more or less certain that the multi-decade strength in bond markets will falter, but the outlook for equity markets is much less clear.
In these ‘interesting times’ asset owners need to ensure that their investment arrangements are fit for purpose. Two important aspects of this are control (alignment between the intention of investments and the actual outcome) and flexibility (being able to make decisions and adjust course in a timely manner). Fortunately, asset owners now have more resources available than before with the easier ability to access futures, options, ETFs and so on. In addition, a greater degree of control can be achieved through replacing actively-managed strategies with the use of alternative risk premia. Indeed, looking at investments through a risk premia lens (what is being accessed and how will it be rewarded) is an important tool for the asset owner.
One important factor that asset owners can control is costs. There are many ways in which costs can be managed, including the use of alternative risk premia and bringing some asset management inhouse, but managing costs is not the same as always opting for the lowest costs. Investments need to be examined through a value-add lens as well: private market investments can be more expensive to access but may deliver higher returns. Similarly, external mandates can be more efficient than internal management or ETFs and the mandate can be structured to ensure an alignment of interests.
At the Railways Pension Scheme, we recently reviewed all aspects of our investment arrangements to provide more control and flexibility. We updated our investment beliefs, added more to alternative risk premia equities, reduced hedge funds, restructured external mandates, brought some assets in-house and adopted a new private markets investment model. In addition, the trustee’s Investment Committee was replaced with a new Investments Board which includes experienced investment professionals from outside the scheme. However, times are always changing and so we use an annual strategic planning process for our multi-asset funds. We look through these funds using multiple lenses (e.g. risk premia, expected return drivers, risk analytics, scenarios, sustainable ownership) and change course where necessary. This does not guarantee success, but we hope it increases its probability.
Ciaran Barr is investment director at Railpen Investments
