Cover story – Recession
Central banks can only do harm because their rele- vance to consumer prices is almost zero. I am sur- prised that they have not woken up to that.
Stuart Trow
default proposition heavily invested in assets which enjoy the benefits of economic growth. While recent asset performance has been disappointing, we continue to believe that investment returns tend to mean revert in the longer term, which supports a relatively heavy weight to equities and other growth-facing assets from a strategic asset allocation perspective.” In its growth oriented default funds built for relatively younger members, the master trust has more than 80% of its portfolio invested in equities and more than a third in US stocks. Year- to-date, the fund’s performance has slumped to -5% in March from 4.6% in January. It has since recovered somewhat and stood at 1.46% by the start of April.
While the master trust has not changed its overall equity expo- sure, it has made changes to the factor allocation. “We are, in relative terms, overweight in value stocks and underweight mega cap growth stocks,” Cunliffe says. “This approach should continue to benefit from an environment of rising bond yields and high inflation.” Nest, the £24bn master trust, is anticipating a more challeng- ing environment by slightly reducing its exposure to tech stocks and diversifying into alternative assets. Compared to last year, the 2040 Retirement Date Default fund slightly re- duced it’s weighting on tech stocks but has so far refrained from reducing its exposure to stocks all together. By the end of Q1, they accounted for half the default fund’s portfolio. This cautious outlook on stocks is also embraced by LPPI’s Tom-
20 | portfolio institutional | June 2022 | issue 114
linson: “For [schemes] like ours, the aim is to build a portfolio that can survive in a range of different scenarios. We tend not to make significant tactical asset allocation moves is response to changes in the macro-environment but will time entry points for long-term allocations. Having said that, within each of our asset classes we do alter the asset mix based on the macro backdrop.” Risk modelling plays an important role Tomlinson adds: “We are constantly thinking through plausible scenarios and how they may impact our portfolio. It’s about building an all-weath- er portfolio and not placing too much emphasis on a single sce- nario. We believe the best approach is to be macro-aware, rather than being macro-driven, because a kneejerk response can go very wrong. We will always ask ourselves, what is the probability and impact of any view being wrong? “Our investment philosophy means that we have a broadly diversified global portfolio mostly exposed to the more defen- sive end of each asset class. We’re generally not in the most aggressive names within equities as we invest in higher-quali- ty businesses with long-run pathways to sales and earnings growth. That means we have missed some of the upswing in tech names, but we have also avoided an awful lot of pain re- cently,” he adds. For example, LPPI’s Global Equities Fund, of which 45% is managed by the in-house global equities team, uses the MSCI World as benchmark but has a relatively lower exposure to US tech. Apple, Amazon, Microsoft, Meta, Tesla and Alphabet are the biggest constituents in the MSCI World, accounting for some 15% of the index. In contrast, only Microsoft features prominently in LPPI’s Global Equities Fund. From 01 January to 29 April this year, the LPPI Global Equities Fund has per- formed 7.7%, compared to 6.1% for its benchmark. The inter- nally-managed global equities portfolio is up 9.6% for the same period. “In a recession, you would have to worry about the non-profitable tech companies because they often rely heavily on financing to survive. And if financing lines are not freely flowing, there will likely be some tough conversations going on,” he says.
Overheated bonds But by far the biggest risks are seen in fixed income markets, which Trow, a former credit strategist at the European Bank for Reconstruction and Development, describes as “overheated”. This is a particular challenge for defined benefit (DB) schemes to navigate as they tend to have the vast majority of their assets invested in fixed income. In theory, rising interest rates should be good news for fixed income investors. Rising yields have certainly had a beneficial effect on the calculation of DB deficits, which overwhelmingly have moved into a surplus. But infla tion, which is dangerously high, could bring all this to a towering halt. With prices rising
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