Covid-19 – Cover story
Stevens says. “Like a lot of schemes, it was more effected by the falls in equities and spreads widening. Its funding fell around 10% and we have recovered around half of that. “There are different stories depending on what scheme you are looking at,” he adds.
The schemes professional trustee Gerald Wellesley works with tend to be underfunded. Most of these schemes have been rid- ing through the pandemic. However, one of his mature, cash- flow negative funds was 60% invested in equities, half of which was hedged. When the market started to recover, they turned some of their un-hedged assets into cash. “We took a view that there might be another dip in the market and didn’t want to be liquidising further equities later on, so being better hedged at these sterling levels might be a good thing,” Wellesley says. “Now we are pretty comfortable. “The assets we sold were about 10% down on their value at the beginning of the year, which was better than the 27% we suf- fered across the portfolio,” he adds. Wellesley points to changes in the prices of gold and gilts as examples of how difficult it is to call the market right during this pandemic. “As a pension trustee, I have been loath to make tactical decisions other the one I mentioned, which was for cash-flow reasons.”
Another professional trustee, Andy Cheseldine of Capital Cran- field, also reports that the pandemic has hardly made a differ- ence to his schemes that are liability matched. “If they are not, there has been a lot of volatility and I wouldn’t want to make tactical investments if you have not done it before,” he says. It is a different story for Cheseldine’s defined contribution (DC) schemes. “DC has come out of it pretty well,” he says. Most of his DC members are in lifestyle. Through the worst of the market in early April, those who are less than two years away from retirement saw the value of their fund improve. “If you are younger and you have seen a 20% or 30% drop in the value of your fund, but are 20, 30 or 40 years away from retirement, it is irrelevant and possibly an advantage because you are buying cheap,” he points out. Wellesley agrees that younger DC investors could actually ben- efit from this volatility. “For those far from retirement, for rea- sons including pound-cost averaging, could end up doing slightly better,” he adds.
Bargain hunters? Post Covid, the world will be different. We are unlikely to sim- ply pick up where we left off in March when most of the world was ordered to stay at home. Where we buy our clothing, gadg- ets and food from may change and there are questions around if office workers could continue typing away at the kitchen table when we get the all-clear. With so much change happening are investors looking to take
advantage of volatility to re-position their exposures. “Everyone is looking for what the long-term trends might be,” Cheseldine says. Some industries are expected to suffer from the pandemic, such as airlines, hotels and cruise operators. “The businesses with good balances sheets will probably survive and do well longer term because their competition will go out of business,” he adds. “There is an element of stock picking in that, but you have to make use of the professionals.
“There is an old line that if you have never picked stocks before why do you think you are suddenly so good at it. Think about what you are trying to do. If you are a passive investor, stick at that. “At the moment we are waiting on things subsiding,” Cheseld- ine says about how his schemes are approaching the changing world and economic uncertainity. Wellesley has personally picked up some bargains during the period but says that he would not want to do it as a trustee. “One has the weight of responsibility of the membership on your shoulders. Picking the winners and losers sounds easy but finding them and making sure that there continues to be value if someone has not got their first is a tricky one. “If your time horizon is long then volatility is not risk. If you need the money soon then volatility is risk,” he adds. “The tendency for the schemes I am involved with to look through this crisis, and acknowledged that there might be a second wave and further trouble in the markets, the view is that it is difficult to try to outsmart the market,” he adds. Mason says that his scheme made an early decision to be over- weight in cash, but it seems that one change in the market was enough to tempt he and his colleagues to invest. “We have seen some opportunities with the current credit spreads, so we are overweight multi-asset credit. We have deployed some of our cash recently in that area,” Mason says. BA has not made any changes in response to what has hap- pened, and it seems the trustees are in no hurry to find new assets. “Are there any bargains? Is this the right time to snap something up? “For me, it is only a bargain if you need or want those assets. Think of it in terms of is it part of your target allocation or stra- tegic framework,” Stevens says.
“If this is good time to get into high yield and high yield is not part of your plan then that is a tactical decision,” he adds. “We are not going tactical and making off-piste decisions.” There are other issues to consider if a scheme is tempted to invest during such volatility. How are they going to fund these transactions and the costs that come with them? Wellesley agrees that funding new investments could be a problem if you do not have the cash.
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