BT Pension Scheme – Interview

design outcomes that fit our scheme requirements. That was one of the drivers behind the more active approach.

It has been a tricky period for active man- agers. Even during the past year, they did not outperform passive managers. What we are interested in are not just the returns, but the characteristics of the returns. In the difficult markets of spring last year, our active managers outper- formed significantly because they had a defensive portfolio. In turn, they under- performed in the strong rebound, but that is what we expected. It is not as blunt as looking at the performance against the benchmark. It is the performance being generated in the context of the underlying market conditions that is important to us.

You also announced a plan to make the scheme carbon neutral by 2035. How are you implementing that? This is exciting. We have been thinking about this for quite a while. It is the nature of our portfolio, especially in reducing its growth assets, that gives us an opportunity to take down some of our emission numbers. We estimate that roughly 80% of the emissions in the portfolio come from around 20% of the assets. That is across equities and corporate bonds. As we

de-risk, it gives us a chance to focus on the implementation side when we go into the credit markets. We are getting under the skin of where the emissions are and avoiding the obvious ones like oil, gas, utilities and chemicals. The state of matu- rity of the scheme lends itself to bringing down emission numbers.

But reducing your equity exposure reduces your influence when it comes to engagement? Yes. That is something we are looking at in our sustainable investment approach. It is about looking at dynamic changes and how we have influence by being in the different parts of the credit capital structure. We can still play a part on the advocacy side, we can still engage. We are also at an inflection point where ESG is becoming so ingrained in society that the argument of not having equities but hav- ing bonds is a bit redundant. We are still an investor. The corporate world has changed in such a way that there is now more of an open door for engagement than there was in the past.

Liquidity means different things over different time periods.

How are you integrating other ESG factors into your portfolio? We are looking at the whole sustainable investment policy for the scheme. Inevita- bly, it becomes a lot wider than just single portfolios or targeted portfolios. Again, it is an issue that the investment world is much more aware of and is embracing it a lot more. If we go back to our functional redesign, I have brought the responsible investment piece a lot closer, so we treat it as a completely integrated investment process.

Let’s talk about the broader investment outlook. US treasury yields have been ris- ing this year, could this be an early indica- tion that we might see a rise in prices? We are at a pivotal point. I suspect central banks are going to keep short-term policy rates low, they have anchored them. If anything, they prefer to see economies

running a little hot. Now, whether there is enough capacity in economies to prevent that leading to inflation is where we will have to wait and see. But if you are looking at bond markets, there is an increased risk of inflation com- ing. That is a fair reflection given the amount of stimulus being thrown at mar- kets and economies in general. It is not obvious there will be inflation, it depends on the capacity in any economy, but it is certainly a key driver of market activity and will continue to be throughout the year.

The argument against this could be that back in 2008/09 central banks also injected a lot of money into the economy. That did not lead to inflation, so why should it now?

Circumstances are slightly different this time. We have the unpredictable back- drop of the pandemic and the stored-up consumption that could be the driver to that inflation. That is one factor we are watching. Inflation has a big influence on how we run the scheme and is part of why we instigated the hedging programme.

What are the biggest challenges investors could face as the economy emerges from the pandemic? How markets respond to central bank action. Markets have effectively been sup- ported by central banks for the past 12 years. I have been around long enough to remember when the Greenspan put was introduced. Ironically, if they have it right, then they could turn off this stimulation into a market that has not seen a tighten- ing cycle for 12-years plus. That is an unu- sual place to be. The response to that tightening cycle will be interesting to see, particularly towards the inflection point, when central banks signal – and they are going to have to signal, the days of central bank surprises are long gone. When the mood music starts changing, it will be interesting to see how markets are going to respond.

Issue 102 | April 2021 | portfolio institutional | 17

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