A colleague sent me this photo last weekend, with the message “Saw this and thought of pensions risk management.”
I loved it!
This week’s market moves highlight how important it is to be realistic about managing your scheme’s risk. At the start of this year few people were calling for nominal gilt yields to reach new lows or for real yields to touch zero before the year was out. The former keeps happening and the latter took place yesterday (16th Novermber 2011):
Here are the yields for a few Index-Linked Gilts, as of yesterday (negative yield implies investors are willing to pay for the added security of holding inflation-linked gilts over nominal gilts):
|Gilt Maturity, year||Closing Yield, %||Intraday Low, %|
Source: Bloomberg, Redington
The unthinkable is being now being discussed – further asset purchases by the Bank of England following their latest Quarterly Inflation Report and, perhaps as importantly for gilt yields, the break-up of the Euro currency. As we’ve seen with all previous crises, there are some assets which perform well and others which do not – investment opportunities will continue to arise and fall whatever the market is doing.
To guide you through these rough financial seas, here’s my take on William Ward’s wise words:
“ The pessimist complains about the markets;
The optimist expects them to mean revert;
The realist adjusts their assumptions and changes investment strategy.”