PI Partnership – Newton Investment Management
DC INVESTMENT IN A NEW MARKET REGIME
Mitesh Sheth MBE is chief investment officer of multi asset at Newton Investment Management
I believe defined contribution (DC) schemes and master trusts have been unfairly criticised for being too focused on fees and efficiency, at the cost of maximising outcomes for members.
Investment commentators are referring to the past 40 years as a ‘super bubble’ or even the ‘greatest bubble of all time’. As we know, the investment backdrop was characterised by declining nominal interest rates, low and stable inflation, and a furious drive for globalisation. Central banks stimulated economies freely, and cheap credit fuelled leverage in the system. A rising tide lifted all boats; the prices of equities, bonds, property and pretty much all assets rose strongly. With the benefit of hindsight, I find it hard to criticise DC trustees and chief investment officers (CIOs) that chose to invest in low-cost passive balanced funds when everything was going up, while focusing their efforts on other more pressing matters.
Looking forward, however, we are clearly entering a new regime, characterised not only by higher interest rates and inflation than many of us have seen in our working lifetimes, but also by more volatility, given the uncertainties around government intervention, supply-chain problems, climate boundary conditions, growing inter-generational inequalities and the reversing of globalisation. Several of these trends are now well under way. Regime changes are indeed rare, but they do happen and tend to have profound implications for financial markets.
It could be much more difficult to achieve positive returns in the next few decades than in the past 40 years, with passive management at risk of disappointing, particularly in real terms, and as it becomes harder to rely on bonds to protect cap- ital given rising correlations between equities and bonds.
Value focus The Pensions Regulator’s ‘value-for-money’ push may be timely in encouraging trustees to place less emphasis on cost and a greater focus on value. More active strategies, for exam- ple, could be better placed to take advantage of the growing divergence between companies, sectors, styles, strategies and countries. Allocating to more flexible, higher-conviction, unconstrained multi-asset and fixed-income strategies may be a better alternative to classic passive balanced funds.
24 November 2022 portfolio institutional roundtable: Defined contribution
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