Cover story – Covid-19


The re-evaluation of illiquid assets will be a lingering effect of the pandemic.


Gerald Wellesley, PSGS


with the scheme’s long-term strategic asset allocation. “We have not given it serious consideration,” he says. What Surrey has mapped are the alphabet of recoveries and how the situation is evolving. “A “W” recovery is generally seen as the highest probability. That situation will only play out towards the end of the year where the likelihood of a second wave is higher. We will react to that,” Mason says. “We are playing on the probability of there being a “W” shaped recovery and our strategy is reflecting that,” he adds. Cheseldine believes that these new bonds should be known by a different name. “Without wanting to be too gloomy, you could call Covid bonds gilts. On a passive basis you are lending to the whole of the economy,” he adds. “If you get into stock Covid bonds you are getting into a world of risk and the point is, do you understand what you are getting into?” Wellesley points out that schemes already have an investment strategy and to consider something new would need to go through a review of the asset allocation, which is something that tends to happen on a scheduled basis.


Long-term changes Cheseldine has been through a stock market crash or funda- mental financial crisis every decade since he joined the indus- try in the 1970s. “This one feels a little different,” he says, “because of the nature of it.


“There will be big changes to pension schemes,” he adds. “We will have to think about where we are investing for the future.”


thing else but is it the right time to sell. “Credit spreads widened substantially for a short period of time so you have to be on the ball to have captured the majority of the value that was on the table for a brief period,” Wellesley says. “You needed to have your finger on the red trading button and also be pretty smart.” Funding a few bargains is easier for DC schemes with Cheseld- ine pointing out that the industry is cash-flow positive with a “raft of contributions” regularly coming in. “Now is potentially a time to make investments into ESG or something that we think is a long-term good bet,” he adds.


Funding the re-launch


The pandemic has increased the pressure health services and businesses, which means governments have to find the capital to support such services and get their economy moving again. To help, they and coroporates have turned to a new class of debt, which has become known as Covid bonds. Mason has looked at these bonds but decided they do not fit


24 | portfolio institutional August 2020 | issue 95


Cheseldine adds that investors who are matching their liabili- ties in gilts or bonds will probably be okay as will derivatives, depending on who is the counterparty. “It is when you get into growth seeking assets that you will have to be more careful. “[From an investment perspective] there will be winners and losers out of the pandemic,” he adds. Wellesley urges investors not to forget about liquidity. There was a time when pension funds who did not need the money were advised to lock in the illiquidity premium on certain assets. Yet the scramble for cash in March showed just how much of a problem illiquid assets can be. “The re-evaluation of illiquid assets will be a lingering effect of the pandemic,” he says.


Another issue, he points out, which is more fundamental for pension funds, is that interest rates have been falling for 30 years. He points to five-year gilts being negative, 10-year gov- ernment debt offering 22 basis points and 30-years paying 0.69.


“Is that a good asset for pension funds to invest in? he asks. “If you are hedged, fine. If not, your upside is that interest rates go down further but the yield you collect on them in the mean- time is meagre and puts more pressure on sponsors.


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