Datta: Yields are low so the expected returns in fixed income are low, while risky asset valuations are generally on the high side. The return profile doesn’t look brilliant, so we need manager skill to add alpha. The question is, are we going to get it? It is more urgent than ever that we get that but it is still a challenge in these markets. As we saw last year with active management, it’s a big challenge to get that excess return from skill. Bart-Williams: Active management is more suited to particular strategies, a high-yield bond strategy, for example. One should not necessarily go hunting for alpha everywhere. Journey planning is important. It is true it might not get you to the end of the swimming pool, but it can minimise the distance by which you might be short. For most corporates there is a distance within which it’s tolerable, and it makes sense to manage your risk as you get closer to that endgame. It is consistent with the concept of being more risk averse as you have more to lose. Scott: Regulators are going to be asking about dividends in the future whereas they may not have done so in the past. That is going to be an interesting. Bart-Williams: We get interesting reactions when we speak to clients about their value at risk. If you start from a place where you put your biggest bets on the views that you hold strongest then it should follow that the value at risk, however measured – whether it’s funding level, etc – when decomposed should show where you have your strongest views. It is rarely the case that trustees have the strongest views on long term interest rates or inflation. They inherited these risks, yet they tend to be the dominant risks of many pensions schemes. It comes back to that point about being aware of where your risks are coming from and sizing them accordingly, not unwittingly betting the whole house on long-term rates going up or inflation coming down. Scott: On the DC side, is being active or passive something that you look at? Booth: It’s mostly underlying passive. It is all about working out where the risk is going to be allocated rather than where the assets are going to be allocated, then trying to allocate the risk in a diversified way that has the right level of portfolio risk and using the underlying instruments, which will be fundamentally index tracking.


April 2019 portfolio institutional roundtable: Managing volatility 19


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