Interview – USS Investment Management
their strategic position in the portfolio? How should we invest in equities given the other assets that we own? What are our liabilities?
I wanted us to step back from stock pick- ing and ask bigger, more strategic ques- tions. That is what we will be doing going forward. We have appointed Innes McKeand as our new head of strategic equities, who joins from Australian Super [A £101.8bn Aus- tralian superannuation fund]. He will be tasked with helping us think about equi- ties from a more strategic top-down per- spective. This includes more longer-term strategic thinking, a greater involvement of responsible investment and how our portfolio is constructed holistically by thinking about how assets and liabilities will work together. This also includes our approach to divest- ment and exclusions. Last year we con- cluded that we should no longer invest in coal, tobacco and various controversial weapons. That is linked to that general change in thematic thinking and our con- viction that the way in which the world is changing made those poor investments going forward so we will exclude them from our equity portfolios.
USS is an open scheme that has the pres- sure of the deficit discussions hanging over it. So, does the portfolio have a strong growth focus? Absolutely. We are not the same as every other investor, so the important question is how we should invest. Equities will remain an important part of our portfolio, but how we invest in equities will be a big question going forward.
It has become increasingly hard for active managers to outperform passive funds in developed markets. Was that behind your decision to restructure the team? We have a respectable history of investing in equities, and I would particularly call out our emerging markets team who we have retained throughout and who have
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given how fragile the world is. It is likely that we will have low bond yields for quite a while.
Equities will remain an important part of our portfolio, but how we invest in equities will be a big question going forward.
an outstanding track record of perfor- mance, including last year. Our medium-term track record and equity investment relative to the benchmark is fine. But my conviction is that we were not focusing on the most important questions. Adding or subtracting a little value from investing relative to benchmark is useful. But the key question is how we should invest in the first place. The asset alloca- tion question within equities and the longer-term strategic approach is what I want to focus on.
Stock markets have recovered rapidly from the pandemic, but many underlying busi- nesses are struggling. How concerned are you about the sustainability of equity valuations?
Asset prices are high. Debt, equities, every investment has an elevated price and they are all connected. Ultimately, the price of equities is justifiable, given the incredibly low bond yields we have. It is that bond yield that effectively is the pric- ing mechanism for all financial assets. If we were to see a sustained increase in bond yields, that would put pressure on equities, but that seems relatively unlikely,
Of course, we are hoping and expecting to see an economic recovery as the lock- downs are eased. But we will probably see some residual impact from the events of the past 12 months for many years. Some of those will be structural changes. It looks likely that our approach to carbon has changed in a fundamental and long- lasting way.
In a sense, now is the opportunity for gov- ernments to encourage growth and for that growth to be focused in areas that will be sustainable. A low carbon future is more likely now and more likely to be rap- idly achieved than perhaps if Covid had not hit. Some other trends are also likely to be quite sticky. We do expect to see a return to office working, but I am confident that most of my employees will not want to be in the office five days a week, even when it is safe to do so. We will see permanent differences in how the built environment operates, commut- ing and in retail.
There are dramatic changes that will impact different sectors of the economy and that are likely to be relatively strategic in nature, rather than a quick resumption of the old way of working.
Is that something you are planning to capi- talise on as an investor?
Where we can. There are assets we already own that will benefit from that and assets we want to invest in. For instance, we announced in December a major invest- ment in
G.Network, a business that is rolling out faster broadband speeds across London. To our mind, that investment is likely to benefit from the change in the way people want to work and want to live. That is an investment that over time will pay dividends.
USS IM is a major investor in UK infra- structure, from Heathrow Airport to shop-
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