Interview – Richard Tomlinson


term prospects of the economy. But what has made volatility extreme over the short- term is the sentiment factor, which has changed quickly, leading to enormous outflows.


One key factor which hasn’t been talked about enough is that as volatility rises, many investors have had risk manage- ment processes in place which responded to that input. Processes are now often conditioned on several market-based fac- tors so if volatility rises, it tends to lead to the sale of certain assets. People have pointed the finger at risk-par- ity programmes, which is reasonable. As volatility has risen, many risk-parity pro- grammes had to deleverage, which led to wholesale selling of pretty much every as- set creating a vicious effect. Risk-parity programmes are, of course, not the only factor in that, but it is clearly the cue to deleveraging.


It is important to remember that these are short-term factors. There will probably be further selling ahead but the key question when deciding where to invest long term is what do the fundamentals look like.


What has been the short-term impact on LPP’s investment portfolio and have you made any changes in asset allocation? Coming into this shock, we were cau- tious. Whilst we have seen pretty good markets for more than 10 years as central banks have provided a strong tailwind; at the back of our minds we knew that valu- ations were stretched and that a lot of good news was already priced in. Add to that the liquidity concerns I spoke about earlier. That is not to say we were broadly in line with our long-term strate- gic asset allocation; we weren’t overweight on risk assets, but we weren’t under- weight either.


The challenge is that it’s easy to predict that the world is coming to an end. How many times have people called for the end of the world over the past decade and cen- tral banks kept pushing forward to drive markets higher?


18 | portfolio institutional April 2020 | issue 92


When the problem is big enough, when the system is threatened, when politicians are threatened, when society is threatened, anything is possible. The rules of the game can simply be rewritten.


The situation we find ourselves in yet again is something I must admit I didn’t quite grasp back in 2008. When the prob- lem is big enough, when the system is threatened, when politicians are threat- ened, when society is threatened, any- thing is possible. The rules of the game can simply be rewritten. It happened in 2008 and it is starting to happen again. Governments can change primary legisla- tion; they can dust off laws that haven’t been used in 300 years. This problem is big enough. The world is focused on finding solutions to the virus, whether it’s developing vaccines or build- ing ventilators quickly.


The way we are thinking about this in terms of the impact on our portfolio is that we have to manage the short-term risk. For pension schemes like ours, be- cause our liabilities tend to be long dated, the focus is on managing liquidity and making sure we have cash to meet our li- abilities in the short term.


We also have to manage the long-term funding levels and be prudent in our port- folio management. We have an advantage over many other market participants in that we can absorb short-term liquidity and we are able to have a long-term per- spective and stable balance sheets.


Is that because as an LGPS pool you have a relatively younger membership com- pared to the average DB scheme? There are multiple factors. We are an open scheme, unlike most DB schemes. If you are in the DB business, you will be in one of two camps, with some shades of grey. If you are a closed scheme, you will be facing an endgame, trying to get some form of surety on meeting your liabilities with as much certainty as possible as quickly as possible.


If you are an open DB scheme, like the LGPS, with a strong covenant, it is differ- ent. We are a quasi-perpetual investor. We are not in an end-game run-off scenario.


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