Scott: A big factor for DB schemes is the covenant, the strength of the employer. If the employer wants you to invest in a group of risky assets because they want the upside then that’s helpful for me as a trustee so long as the employer understands that risk. Because the markets have gone up in the past seven or eight years, people have almost forgotten that growth assets can go down as well as up. Investing in equities is seen as an automatic way of getting an extra return, but it is potentially a way of losing that extra return. Datta: One of the challenges is that understanding how much risk you need to take to earn a return is a tricky concept to grasp. Various trustees have said to me when I talk about risk-adjusted returns: “Ah but, you see, risk-adjusted returns do not buy you lunch; only returns do.” This is the difficulty. They want the risk when they know they can get the upside but they want none of the downside risk. There is no investment on earth that can do that. That is the aspect that is difficult to grasp for a lot of people. Scott: It’s the proportion that you put into the risky assets. Asset allocation is the main driver of what your returns are going to be. Being in the right place or the wrong place doesn’t really matter. Booth: What strikes me is that bit about understanding how wrong it can go. Instead of looking at the funding level, a sponsor needs to understand what the contributions at risk are and make a calculated


14 April 2019 portfolio institutional roundtable: Managing volatility


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