Covid-19 – Cover story


“It is going to be an interesting dynamic where the relationship between equities and bonds, which worked well during the cri- sis, has to end at some point and over the next few years, depending on the path of interest rates, perhaps a re-evaluation of that old adage that if your fixed income assets are not able to return an adequate investment return what else is there? “Equities have their own issues but tend to be where people end up when they cannot find anything else that looks like it will deliver the growth they need. “So, there will be long-term lingering effects as a result of that and it is difficult to read where we will end up,” he adds. Issues such as liquidity, leverage and counter-party risk should have been looked at by schemes, but the crisis will see these issues come to the fore more in future, Stevens believes. On the long-term damage to pension schemes issue. “A lot of pension schemes would have taken a hit on their funding posi- tion but when you project that into the future you will see a lot of investment houses that might make allowance for higher returns from certain assets. There is a little bit of a countering factor that in credit and equities, for example, you have proba- bly seen some of that increased return come through. Forward looking assumption might be making higher returns now.”


Staying sustainable


ESG has become a mainstream investment strategy in recent years and market volatility linked to the pandemic is seen as a real test of investor bullishness for sustainable strategies. ESG is a critical part of Surrey’s risk matrix. “The situation in China asks serious questions, particularly of the S part of ESG,” Mason says. “As a fund we have been on the front foot with this by mapping the portfolio against the UN’s Sustaina- ble Development Goals to inform our decision-making com- mittee in how they develop the core investment beliefs that will drive us through to the next stage of our strategy planning.”


ESG credentials have remained strong as ESG-tilted funds are underweight oil, and industry that has been in crisis during the crisis.


“The bigger picture with ESG,” Wellesley says, “is that the mar- ket realises an ESG-focused fund will not only be good for us all but will deliver better financial results. “The fact that the road test worked in Covid, however relevant that is, will be helpful to the long-term trend, which is under- pinned by regulatory change.” He adds that while DB schemes have taken this seriously for some time its merits are now reaching DC schemes. “Every master trust, whether they like it or not, is having this front and centre of the agenda from an investment point of view.” Mason says that the new stewardship code requires managers of capital “to not just take ESG seriously and give lip service to it but set tangible metrics that we are reporting to”. Stevens adds that a lot of focus and resource has gone on the Covid response but ESG has not dropped off his schemes’ agenda and it is still an important focus. “Covid was another thing to think about, but it has not changed the direction of travel,” he adds.


Also expecting the social pillar of ESG to be more prominent post-Covid is Wellesley. “The social side of things will be inter- esting in that will company behaviours through the downturn towards their employees and suppliers end up having a greater proportion of the argument in future or not. We will see how that plays out.”


To learn more about how pension schemes are investing through the pandemic, watch the unedited video of the discussion, and other debates between institutional investors and their advisers, at: https://www.portfolio-institutional.co.uk/portfolio-audio/


Issue 95 | August 2020 | portfolio institutional | 25


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