Investment with the benefit of hindsight

Topic:

Funding & investment

Date published:

Thursday, 11 June 2020

Author:

Gerald Wellesley

With all the turmoil we’ve seen in investment markets recently, I thought it would be interesting to look at what pension schemes should have invested in and what they should have avoided.

As ever, timing is a critical element in active investing. Assets that have performed well during the teeth of the crisis - such as gold, government bonds, technology (Amazon, Netflix, Facebook etc) and healthcare stocks - may not be those that continue to perform well as we exit. Take gold, a traditional safe haven investment. It was $1,676 per ounce on 8 March, falling to $1,473 the next day (November 2019 levels) before rising to $1,738 on 21 May. Great if you got in at the right time, but not so good if you didn’t.

Government bonds have also done well. Central bank action has driven yields lower - notwithstanding blooming levels of debt issuance to fund government support programmes - but have been volatile too. 10-year gilt yields were 0.57% on 13 February, falling to 0.16% on 9 March, rising to 0.88% during 18 March then back to 0.22% on 21 May. US treasuries have followed a similar path. Both still a good investment if you had held on to those already owned before the crisis.

Where are we heading?

Most say markets will go back to pre-crisis levels once a covid-19 vaccine has been found. If so, only the nimble and well informed will prosper by trading the right securities at the right time.

What will happen to government bond yields after the crisis? Common wisdom suggests government will strive to keep yields low so they can afford the interest on mushroomed debt levels. The question is what happens if there aren’t ready buyers (other than the central bank) at those levels for all that debt? Or all that money printing finally feeds through inflation? Interest rate rises would mean losses on those gilts.

What if this crisis has changed some social habits forever? Well, then technology and healthcare stocks might fare better.

Will 60/40 be a winner?

From a pension scheme perspective, it could be the traditional balanced portfolio of a 60%/40% mix of stocks and bonds with some property or infrastructure thrown in was the right longer term mix yet again. Although there wasn’t far for interest rates to fall, they have done some work to cushion equity falls and, as we recover, equity price rises should balance modest rate reversion. Even the property allocation, mostly frozen through the crisis, will see normalisation albeit with possible longer term effects if work and social habits change permanently.

What about cash?

A different aspect is the FCA’s push for investment pathway solutions to be offered to non-advised income drawdown customers. Their rationale is customers were holding too much in cash and not making an active investment decision. In hindsight, an investment in cash in the first quarter of 2020, whether an active decision or not, now seems quite a smart move! Potentially, markets could be volatile for some time to come, so retaining cash as an investment until the introduction of the investment pathways next year may also turn out to be a clever move.

For the agile pension scheme, there have been asset protection and investment opportunities (such as corporate bonds when spreads widened substantially for a nanosecond) to be had through the crisis. For many though (including defined contribution (DC) savers), it has been a matter of sitting tight as the ship rides the storm. How much damage she will have sustained by the end of the journey is for all those Zoom calls to ponder.

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