Cover Story | Equities
lead on sustainability – a theme that has fil- tered through into its substantial equity holding. “In this portfolio, we invest not just for the return but for the positive impact the company is making,” Groenendijk says.
PGGM has tens of billions of euros invested in equities – the precise number is differ- ent for each of its clients – and, for the moment at least, has no intention of mov- ing out. “To improve funding ratios of pen- sion schemes, we need exposure to the growth of the world economy and that comes through having equities in a portfo- lio,” Groenendijk says. “There is still growth to be had – for example in emerging markets and the US – we are not saying goodbye to the asset class.”
IT’S A SMALL(ER) WORLD AFTER ALL But this world of equities is changing. Since the 2008 crisis, the number of com- panies listed on the London Stock Exchange has dropped almost 36%, according to the World Federation of Exchanges. In the US, the number has fallen 30%.
This is mainly due to new companies fail- ing to come through to replace those that drop out through mergers, collapse or being taken private. Hill at Pi recognises a change in how com- panies are raising capital.
“It is no longer just through equities, but private debt is increasingly important,” he says. “Trustees have to take a really dynamic approach to how they invest in companies, which is something they have never had to do.” Groenendijk at PGGM has seen a shrink- ing roster of companies and fewer coming to market in their early growth phase, but for the moment is not worried about capac- ity to invest. “There are fewer equities than there used to be, but it is still a large mar- ket, even for a large investor like us,” he says. “We have also increased our allocation to private equities and markets. They make up 5% of our portfolio now.” In the UK, the Royal Mail Pension Scheme employs a portable alpha strategy for some of its equity investments. For chief invest- ment officer Ian McKnight, there might
still be too many companies listed on pub- lic exchanges. “If you look at the S&P, or whichever large index you want, there is a small portion of zombie companies,” he says. “So, if you buy the market, you end up owning all this stuff, which is fine while the party goes on as it all rises at the same time. But when it all comes crashing down, you will see what is washed up on the rocks.” Therefore, investors looking at equities need to make some fundamental decisions about where they want to be on the capital structure and how they foresee their invest-
says. “It is having the effect of capping earnings and preventing the market getting too high.”
(NOT SO) GREAT EXPECTATIONS Watching the comparative performance of other asset classes, equities are no longer expensive, according to Svennesen, who looks at what the security is set to yield compared to its price. But in the long term, he thinks investors may have to temper their expectations around equities, as the recent past has caused a shift in their long-
We don’t expect the same performance
from equities that we got 10 years ago – especially from developed markets. Anders Svennesen, Danica Pension & Danske Bank Asset Management
ment working out. “When looking at a company, you need to know what growth is going to look like,” McKnight says. “How will it be priced into the movement of the stock? How will a company change its divi- dend policy – and what can an investor do about all of those?” For McKnight, there are other opportuni- ties to access the growth of the world econ- omy including certain illiquid asset and fixed income – the trick is to spot them. “There’s hundreds of millions worth of cor- porate debt that is offering investors a neg- atives yield,” McKnight says. “Additionally, there are companies that are hiding under an investment grade moniker but really offering junk bonds. So, it is not just as easy as selling out of equites and into bonds anymore.” Groenendijk at PGGM agrees. “Are we at the end of a bull run in equities? We might be, but we could also be there in fixed income, where everyone is moving into, and private markets,” he says. “It’s not that clear that we should be exiting equities.” PGGM does not do tactical asset allocation in the short term, “but we are watching the current trade wars as they are impacting earnings in many sectors”, Groenendijk
32 | portfolio institutional | June–July 2019 | issue 85
term performance. “With the declining interest rate, the risk premia is compressed, meaning it is harder to make alpha,” Sven- nesen says. “The potential for alpha is much less. We don’t expect the same per- formance from equities that we got 10 years ago – especially from developed markets.” Svennesen believes there might be markets where high alpha is obtainable, but the fees associated with finding it will also be high and eat into performance. “I do believe in alpha – despite holding so much in index funds – but it is simply going to be harder to find,” he says.
In the short term, however, all eyes are on the US and how its monetary and fiscal pol- icy, along with associated trade wars, might ripple through every global market. “We are due a recession and it might hap- pen in the next two years—or not,” McK- night says. “But if it happens, investors will have to reassess their portfolios.” With poor confidence in the ability of regu- lators to rescue markets for a second time, having used much of their firepower up in the crisis, pensions are advised to keep a watchful eye. The relationship is not over, but it is fundamentally changing and both sides need to adjust for it to last.
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