Scott: Where they are expanding is in credit. It’s something that regulators are trying to get what they call “efficient capital” for DC schemes. It’s trying to get DC investors into these, so its infrastructure, private lending and so on. Datta: If time horizons are shrinking, then the capacity and the ability to withstand illiquidity have also reduced. That is not a logical fit if you are going towards buyout. That is the big problem behind increas- ing illiquid asset exposure. Bart-Williams: In our experience, clients are clear on what they are using strategies for. Typically, illiquid assets are used for their cash-flow. You take income from them and they are typically distinct from the assets that you would sell if you need liquidity. So there’s a liquidity ladder in our clients’ minds as to where illiquids sit, whether it is a buy and maintain corporate bond portfolio or emerging market debt. They sit at different rungs of that liquidity ladder. Booth: It still gets difficult on the DC side. You have purchases and redemptions going all the time and so you need a daily valuation. We have just hit £1bn under management, which is actually quite low to have meaningful illiquid assets in it because you need such a diversity of those liquids to stagger the valuations to make it fair.


PI: How do illiquids fit in with the charge cap? Booth: The charge cap is a big issue. At the moment in DC, in everything you look at that’s illiquid there is a bit of a fudge to make it work. For DC members, for instance, it’s lovely to think: “Okay, I am invest- ing in that new hospital in Manchester,” but at the moment it’s just about getting those valuations right. Drewienkiewicz: To come back to the core point, what you can invest in to make you much more relaxed about volatility are assets with high-quality cash-flows that you know are going to get paid, it doesn’t matter where they are from. If you buy attractively-priced cash-flows then everyone’s happy. The problem is that at the moment all the cash-flows that are in the public market are quite expensive. The cash-flows that for a little while we thought were a bit cheaper have been in the illiquid market, and it is difficult for DC investors to access those. I would agree that if you are not careful there’s defi- nitely an element of fudge that goes on, particularly in DC where the fee cap is even more of an issue.


PI: What impact will geopolitical risks have on the markets? Scott: The uncertainty in the markets just now is making it difficult. What’s going on in the Commons, what’s happening with the US and China, all that stuff makes it difficult to know where to invest. Drewienkiewicz: The smaller holdings in equities have helped that a lot. We obviously saw rates fall to the asset liability point, so funding levels, particularly where people aren’t fully hedged, will have been a lit- tle bit more challenging. Overall, people have weath- ered this reasonably well so far. Bart-Williams: Volatility and uncertainty are almost existential. Today it’s the Commons, a couple of


years ago it was Trump and before that it was the French elections. There will always be a story that makes the world an uncertain place. If one accepts that, then doing a lot of the stuff that we talked about today – diversifying, being clear on what your endgame is and that your strategies align with that – will continue to be broadly the right thing to do. Preparing for volatile times is something that we are just going to have to do forever.


April 2019 portfolio institutional roundtable: Managing volatility 21


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