On Friday, June 24th, Britain voted to leave the European Union. It’s fair to say this surprised a lot of people (on both sides), including the markets. Falling interest rates, a weaker pound and political uncertainty has left a lot of people feeling on edge.
For those of us responsible for managing pension funds, can it be useful to reflect on the “VUCA” of our time.
Volatility, Uncertainty, Complexity and Ambiguity
Derived from the US military and now used in corporate strategy, VUCA is a term used to describe extreme conditions. For those of us in the world of saving and investments, VUCA refers to:
Financial market volatility; the degree of variation in bond and equity markets.
Inability to predict future changes. For example, what is going to happen post Brexit? It’s impossible to predict anything at this point.
The proliferation and complexity of financial instruments, combined with new rule ...
The ramifications for investors of the UK’s referendum decision will take some time to materialise.
We are entering uncharted territory - nobody knows precisely how Brexit will be implemented or its consequences.
What is clear is the result will herald a period of considerable uncertainty and market volatility.
If we have learnt anything from history, it is that these kinds of major events happen surprisingly regularly. Which is why it is so important to design and implement a robust, risk-managed and well-diversified investment strategy for the long term. And why it so imp ...
What are the economic implications, potential market impact, and consequences for UK pension schemes of Brexit?
In my previous post, I discussed the timeline for Brexit, should it happen, and split it into three periods: pre-referendum, post-referendum negotiations and post-negotiations.
The purpose of establishing these divisions was to emphasize that leaving the EU would not elicit an immediate step-change for the UK economy. The change would be gradual and the economy would behave differently in each period.
With that in mind, let’s consider (briefly!) the economic impli ...
At Redington we read with great interest the pension regulator’s DB funding statement 2016. I thought the four key takeaways from an investment perspective were:
1. Acknowledge the importance of negative cashflow, and plan for it.
“As schemes mature, liquidity planning is becoming an important consideration, especially where the cash flow requirements represent a significant proportion of the scheme assets. Market developments may mean that schemes are forced to sell assets at lower than expected prices in order to meet cash flow demands. This could put increased pr ...
Automobiles started out as a toy for the rich, a symbol of excess.
They were complex and needed expert drivers. Then, Henry Ford came along and turned it all on its head. The Ford ‘Model T’ was revolutionary for its time - it helped bring cars to the masses and took the mystery out of the ‘horseless-carriage’.
Is the way we look at hedge funds not dissimilar to the infancy of the automobile industry?
Surrounded by mystery, a black box that’s reliant on the magic of manager skill, so-called ‘alpha’. People pay for things they don’ ...
Unless you have been living on Mars for the last few months...
In a cave, with your eyes shut, and your fingers in your ears...
It will have come to your attention that there will soon be a referendum on these shores.
Depending on your political hue, this referendum is one of two things:
An opportunity for the United Kingdom to unshackle itself from an ossified bureaucracy, to protect its borders, and to finally Make Britain Great Again.
A grave threat to the prosperity of the British people, which has been seized upon by political opportunists for personal ...
Alpha describes the excess returns a fund can generate relative to the return of a reference benchmark. This benchmark return is called Beta.
Traditionally, these benchmarks were market cap weighted indices, such as the FTSE All Share or S&P 500. Since the 1970's, it has been possible to buy cheap access to them via passive funds.
Click to tweet >> An increasing number of Smart Beta strategies have tried to improve on the market cap weighted benchmark: http://bit.ly/1Po1gnP
In recent years, an increasing number of Smart Beta strategies have tried to improve on the ...
The landscape for managing pension schemes continues to change..
Now, more than ever, pension trustees and corporate sponsors are facing a number of challenges: lower yields, sponsor balance sheet and new regulations to name a few. However, the fundamental problem still remains the same. To secure and protect member benefits, funding deficits have to be repaired.
In the past, deficit repair discussions have happened in a silo way. Every three years, trustees and sponsor would get together and have what is more of a negotiation over contributions, rather than aim to agree a long- ...
PRS is becoming an area of interest for institutional investors. Why?
First of all, what is it?
Private Rented Sector (PRS) is residential property that is not occupied by the owner but rented out by private (as opposed to social) landlords. The English Housing Survey suggests it currently represents 19% of the English residential market.
According to PIA Property Data Report (2014), the UK Private Rented Sector market is £839bn in size. To put that into context, the UK commercial property market is £683bn.
Why is it interesting for potential investors?
Clients often ask us to what extent our expected returns should adjust to changing market conditions. For an investment grade bond, this is relatively easy - you will earn the credit spread less any defaults. So it’s quite straightforward and objective. For equities, it is much harder to say whether the market is over or under-valued. There are lots of measures that appear to work historically, but interpreting the evidence is fraught with subtleties. One commonly used metric is the Shiller P/E ratio- but does the evidence hold up?
Shiller P/E Ratio
Click to tweet >> T ...
In our previous RedBlog post, my colleague Dan discussed how to incorporate expected rate rises into the liability hedging decision. In this piece I offer an alternative perspective on yields and liability hedging.
A Little Background
Over the last few years, many investors have delayed hedging as they believed that benchmark yields would increase, meaning that hedging would be cheaper later. These increases were expected as a result of the end of quantitative easing and central banks raising their historically low policy rates.
It has been a long wait.
Today, unemployment is c ...
Most pension scheme trustees would agree on one thing. Long-term interest rates are at low levels in the UK today (compared to their history). It’s easy to find explanations for this among economists. It's just as easy to find predictions they will go up, down, or stay the same. Unfortunately economists and markets have a poor track record of predicting interest rate moves.
The point of this post is not to offer another view on interest rates.
If we believe rates are rising should we still be hedging?
Pension schemes feel like they are stuck between a rock and ...
How can the language of music help to decipher the jargon in pensions? Many industries and professionals carry their own technical language (“jargon” for everybody else), so it can be helpful to translate this into more familiar terms.
During her one week internship at Redington, A-level student Antara Roy did just this – read on to see how playing a flute is useful in learning how to prepare a flight plan:
"A passion of mine has always been music; whether it has been listening to ...
“When deciding how to invest a pension fund’s resources you must consider the indexation treatment of each liability tranche to get an accurate picture of the interest rate and inflation sensitivity of scheme liabilities”…
…was definitely not what was going through our heads when first joining Redington. It’s easy to look back just 10 months and laugh at those, frankly, basic questions.
The asset universe is an endless world of complexity. A world full of mystery and confusion.
Even the acronyms themselves were more than enough to deal with, ...
In my last Pensions Expert column, I wrote about the challenge for the new Pensions Minister in balancing short-term political expediency with truly progressive pensions policy.
If we are to achieve long-term sustainable retirement provision, policy needs to be aligned with long-term objectives rather than short-term vote-winning.
There have been calls from some quarters for the new Pensions Minister, Ros Altmann, to consolidate the changes made under Steve Webb and his predecessors and resist radical reform. Yet affordability of pensions is one of the UK’s biggest challenges ...
Because sadly, prioritisation doesn’t always mean doing the easiest thing first…. or the sexiest.
In their quest for performance, amateur cyclists, like a number of Trustees and CIOs, can sometimes focus their attention on the wrong things… in this respect, setting the right investment strategy is not dissimilar to cycling and gives rise to the same pitfalls.
We love to focus on the “sexy” and forget about the basics.
What’s Your Average Amateur Cyclist Got To Do With Investment Strategy?
Take your average enthusiastic amateur cyclist. You ...
The tax paid* on your overseas equity dividends is not usually top of the pile when talking about your investment strategy.
However, the issue is significant. Long-term returns can vary by up to 0.5% p.a between two identical global equity indices due to the differing treatment of dividends*.
30 years to 31.12.2014
Net Dividends Index
Gross Dividends Index
Source: Bloom ...
Negative interest rates don’t seem to make a lot of sense.
People value money now, more than potential money in the future. You need to pay people to deposit their money longer-term.
Think about it...
This means interest rates should always be positive. The lognormal distribution is often used for interest rate moves. This does not allow negative rates1. Besides, if it costs money to lend money, it seems likely that people will stop lending.
That’s the theory; what’s the reality?
Like a great many arguments this is ...
What does last week’s Pension Freedom Day mean for more than just the individual? The media coverage has been largely monochrome in its assessment of economic risk.
What about the big picture?
Opinion of the new policy aside, commentators seem to agree on one thing. ‘The risk’ is of retirees blowing their hard-earned savings in a spending spree and becoming dependent upon state welfare programs for maintenance. The imagined queue of new retirees outside Lamborghini showrooms and Luxury cruise operator offices makes for a compelling news story, after all.
Implementing our investment principles means that it would be useful to measure the complexity of different assets and asset allocations via a complexity ranking.
As complexity increases the average expected return tends to increase but the average fund manager fee also increases.
Increasing complexity can be a way of increasing returns without increasing risk.
Low complexity portfolios may not be the best solution for clients needing high returns.
Two of our investment principles are:
“Investment strategy should be as simple a ...
Tim Ferriss has enjoyed a cult following since publishing the “Four Hour Workweek” in 2007. Ostensibly, Ferriss’ book helps readers to pack in their 9-5, outsource all their quotidian responsibilities and instead, join the “New Rich” travelling the world, fulfilling their dreams.
One could be forgiven for dismissing the book as a tacky, get-rich-quick scheme. The title alone makes the book sound like an infomercial. Look beyond the marketing, however, and you will find a new perspective on time management and productivity. Ferriss combines established id ...
An old chess anecdote tells of how the Russian master, Nimzowitsch, was unsettled when his opponent took out a cigarette case and placed it next to the chess board during a match. Nimzowitsch, who hated cigarette smoke, immediately called the organizers and lodged a complaint. The poor officials argued that as the man had not lit up and there was no smoke there could be no complaint. “I know” retorted the great Nimzo, ‘but he threatens to smoke and you know as well as I, that in chess, the threat is stronger than the execution’.
As in chess, so may it be in ...
Optimist: “The glass is half full.”
Pessimist: “The glass is half empty.”
Engineer: “This container is too big for the amount of water it is holding.”
We all know that for many things in life the Goldilocks approach works pretty well. Nevertheless when confronted with a complex problem, we often seem keen to find the easiest, quickest solution.
In most cases, this simply does not work. A car engine or an airplane is a fiendishly complex thing to design and build. It took Airbus 11 years of work and estimated development costs of &eur ...
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