David Stewart – Interview


term journey plan. There are time-based and market-based de-risking triggers and we are progressively re-allocating from growth assets into matching assets over time.


Is that generally into fixed income or are you considering alternative assets? It is generally fixed income. One of the more interesting things we are doing is the diversified illiquid income portfolio. We are leveraging internal competences to source assets in that portfolio, particu- larly through our property team, acting opportunistically within fixed income markets. That is part of our matching strategy. The ability to use assets like that within our matching strategy is going to be a key part of the strategy going forward as the schemes mature. It is not just the asset allocation, it’s the investment philosophy where your mind- set switches from traditional growth assets towards matching assets. That is one of John’s key tasks. He is there to help us with that cultural shift from growth to matching assets.


APS is different. It does not have an alloca- tion to equities but has a relatively high exposure to real assets, why is that? The real assets, private equity and other alternatives, are all in run-off. It looks high because the buy-in we did two years ago took a chunk of the fixed income out, so it looked like we increased the alloca- tion to alternatives when, in fact, it is a result of the buy-in.


How have APS and NAPS been affected by the market volatility we have seen this year? Were they affected? Definitely. Were they affected badly? No. As a widely diversified long-term investor, we buy things pretty much on a buy-and- hold basis. Our quality bias across equi- ties and credit, combined with the alloca- tion into private markets kept things relatively stable. The bounce-back was so


quick that it did not do a huge deal anyway. We were concerned about the property and credit portfolio given what happened in the wider market but our experience with those asset classes has been resil- ient. Our property and credit teams have done a good job in building genuinely resilient portfolios.


But for property, the long-term impact of the crisis may yet to be seen.


It is but if you look at the sectors where there has been capital impairment and impairment in rental collection that is already showing. That has been quite a significant feature across the market and we have been resilient on both those metrics.


Is that due to the sectors you are invested in? Some sectors, like warehousing and logistics, seem to be benefiting. There has been a benefit from sector allo- cation. Our team decided several years ago to not be in shopping centers. The team have a distinctive strategy which has generated outstanding returns over mul- tiple decades.


As a scheme with a significant allocation to fixed income, are you concerned about inflation or are you confident that your lia- bility matching strategy should offset such risks? God knows. People who know a lot more about it than me have been forecasting increased inflation for many, many years and we haven’t seen it. Will it come back at some point? Of course, but it is unclear what will cause it to come back now that wouldn’t have five or 10 years ago. That is a huge open question.


At this point it is also hard to tell which way pricing levels could go. It could be both. It will be both. It becomes increasingly clear that the environment we are in now isn’t too different from before the crisis. Last year seems like a completely different time, but since the global financial crisis there have been worries about distortions of capital mar- kets and where sustainable economic growth would come from. Those structural issues have accentuated over the past few months and will have reper- cussions in the years to come. But it hasn’t changed the direction of anything.


We need to be able to turn down the volume on what financial markets are supposedly telling us and take a view on the long-term prospects of individual companies.


Issue 96 | September 2020 | portfolio institutional | 19


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