Feature – Equities
This is a typical truism for many open DB schemes: the long term is all. Such an approach is shared by Matthew Cox, invest- ment director at the Esmée Fairbairn Foundation, a charity that aims to improve peoples’ quality of life. “We have a long-term time horizon and, as such, keep a high exposure to equity mar- kets. Any adjustments we make are likely to be at the margins and related to rebalancing,” he says.
An alternative view That said, the ‘stick it out’ approach is not the only stance investors have opted for. Inevitably, given the outlook, there is a view to look at other portfolio options beyond the asset class. Even someone committed to equities like Graham is looking at his portfolio in more detail. “We will, as part of our strategy review, be looking at the scale of our UK and emerging market exposures, partly given the scale of exposure relative to GDP weighting and in the context of long-term performance in emerging markets,” he says. Will Ballard, head of the equity investment team at Border to Coast, has identified an asset class he considers a solid alterna- tive to equities. “An area we believe offers attractive value in 2023 is the listed alternatives sector,” he says. “Average dis- counts to net asset value across infrastructure, real estate and private equity investment trusts are close to the post-global financial crisis low.”
Digging deeper on this, Ballard adds: “The sector’s sensitivity to interest rates means that this is likely to shift from being a headwind to a tailwind as expectations for central bank policy begin to moderate.
“The sector offers investors an attractive entry point into long- term secular growth themes, such as renewable energy, and its highly predictable cashflows should provide resilience in the face of any weakness in the global economic environment or more persistent inflationary pressures.”
Healthy growth John Porter, chief investment officer and head of equity at New- ton Investment Management, offers advice on other sectors that could benefit investors.
“One area we are particularly excited about is healthcare inno- vation,” he says. “There are many elements of healthcare that we believe could see multiple decades of progress condensed into just the next few years.” Porter cites new forms of healthcare delivery, whether it is tele- health or better primary care, which are expected to become much more “robust”. Secondly, he sees attractions in technology – or at least technol- ogy companies that stand apart. “In technology, companies that differentiate and distance themselves through unique intellectual property or business models, and which have
44 | portfolio institutional | March 2023 | Issue 121
assembled impressive innovation and go-to-market engines, are likely to have greater opportunity to achieve important scale in their core businesses, which could enable them to dominate the landscape,” Porter says. Tomlinson admits that as a long-term investor, technology is something he is keeping an eye on. “As I say, we look at the long-term horizon, and here, there is a big question about tech and where tech goes over the next 10 years.”
Great transformations But it is not all about healthcare and technology. “Industrials engaged in the transformation of materials, substances or components into new products are driving innovation around areas such as energy transition, infrastructure, and the move to electric vehicles,” Porter says. Finally, he notes the energy sector also appears attractive as the severe energy supply crisis takes hold of the world. “Many energy companies are employing new business strategies as they focus on capital discipline, returns and returning cash to shareholders,” Porter adds. “Energy has also proven to be an under-owned sector despite showing robust performance over the past 12 to 18 months.”
A third option for investors is to seek equities that will not be struggling, as they will not all be equally cursed. Ballard gives some indications of his thinking, highlighting that emerging market equities offer a reversal on recent times – having struggled during the past 12 months and being one of the worst performing equity markets. “China’s growth slowdown exacerbated by structural issues in their property market and their approach to handling Covid
We need to maintain exposure to growth assets, and listed equities are a key part of this.
George Graham, South Yorkshire Pensions Authority
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