2019 Summit Overview

The recently held annual Summit embraced the global theme of: Inspire, Connect and Energise, with the aim of inspiring by new ideas, connecting people sharing similar challenges and energising delegates to embrace new opportunities. We wanted to share highlights from some of the sessions held through out the day, to give you an insight into the topics we discussed. 

Making sense of the world today - One investment at a time

Global market outlook: We should worry about the low return environment 
If history continues to repeat itself, we are late in the cycle and the question that is constantly repeated is: when will the cycle end? We highlighted that low risk-free interest rates are an indication that the return outlook for the next 5-10 years isn’t great, investors need to be guided by a process in order to drown out the market noise.

Recession risks being pushed out to 2021 or 2022
We are in the second-longest bull market in history and whilst there is plenty to keep us up at night, China/U.S. tensions and Brexit limbo – recession risks are being pushed out for now. In this session we examined five of the most important investment themes. 
Recession watch – the scenarios and probabilities are: a continuation of the bull market (35%) with a substantial trade deal that clears uncertainty, a mini-deal (40%) that puts trade tensions on hold with a modest recovery, or a downturn to a bear market (25%), with trade war escalations and global economy dip. 

What does the outlook mean for portfolios and strategies?
Risk and return are continuously varying. Uncertainty always exists, whether political or economic. It is crucial to judge what is already priced in. The risk of not generating a return is just as significant as managing downside risk. Diversification is not the only answer, but it is important. Our investment process is dynamic and achieves purposeful diversification by having clear conviction. Our goal is to achieve your targeted return, within the risks you can survive. 

So, how do you navigate through uncertainty?
In the second part of this session, we discussed how a clear and pragmatic process helps you step away from the market noise, get a clearer picture of the risks, and navigate the ups and downs of the investment cycle. Our strategy is based on three important factors: cycle, valuation and sentiment. 

Beyond the hype: Is fiduciary management all it's cracked up to be?

The growth in the number of fiduciary management mandates
Fiduciary Management (FM) was introduced as a packaged solution in the mid-2000s, and rapidly grew. Today, there are over 660 full FM mandates in the UK1. Whilst some pension schemes have many years' experience of employing fiduciary management, others are thinking about employing fiduciary management for the first time. 
During this session, we asked attendees the following question: How many of you thought that FM was just going to be a short-term fad? – 62% said that ‘conceptually it makes a lot of sense’ so not surprised at growth. 

Has FM worked in practice?
Defined benefit pension schemes are maturing. As members retire, trustees need to ensure pensions are exposed to limited risk and benefits are paid on time and in full. The most important question to ask today is whether or not FM has worked and if trustees received the results they were hoping for, from both a quantitative and governance perspective. 

During this session, the panellists discussed their experiences and outlined how they feel FM is beneficial from a trustee perspective. They all agreed the FM solution is, in practice, extremely complex and specialised. It can provide trustees with additional capabilities that may fall outside of their expertise, this includes; specialist advice on asset classes, risk management and detailed analysis.  

Glenn Dixon, Independent Trustee, explained that, in a challenging investment environment, decisions as a trustee can take too long, introducing FM can improve focus and allow the trustee board to engage efficiently and in a timely manner on the wider strategy.
The complex and robust solution will become an extension of the trustee, providing investment consultancy, an asset management platform and underlying asset managers. 

Does FM improve governance?
Greg Wright, Director of Investment Advisory at KPMG, explained that FM provides a governance model that allows you to appoint a team of qualified specialist investment professionals for your scheme which you can delegate the day-to-day investment decisions to your trusted partner. This allows investment decision-making to be efficient and nimble – a requirement in today’s volatile market. 
The chosen fiduciary manager will evaluate the trustees’ needs, how involved they would like to be in the day-to-day decisions and have a deep understanding of their level of interest and interaction they would like with the FM partner. 

The bottom line
The panellists agreed that the FM will only work if the chosen partner suits the needs and requirements of the trustee. It is crucial to have a stronger debate about the model from the beginning, as there are many “in between” solutions that may be more specific of the needs of the scheme, resulting in the flexibility to appoint an FM partner either in full or with a partial service. 

Achieving impact through private markets

What do we mean by ‘impact’ investing?
Today, impact investing is a very commonly used phrase, yet it’s often confused with responsible and sustainable investing. When we asked our audience, what (if anything) has stopped you from allocating to impact investments to date? – 38% said it was down to lack of knowledge. 

We asked our panellist, Karen Shackleton, Independent Trustee at Pensions for Purpose, to clarify what we mean by ‘impact’ investing. She explained that impact investing is not an asset class, but an approach to investing; about how your capital is being used to return income at the same time as having the additionality to make a difference. This can potentially be achieved in any asset class. Impact investing can accomplish strong impact objectives and an attractive risk/return profile simultaneously. 

Impact investing through private markets
Our panellists discussed how impact investing through private markets can result in your capital making a difference, an additional positive impact on social or environmental factors. When investing in private markets you can enable more direct influence on what your capital is used for. 

Daniel von Preyss, Head of Private Equity Infrastructure at Impax Asset Management Limited, explains, when investing in private markets for the first time, or perhaps in the early stages – you can take a practical approach. Establishing the key objective of your investment and starting with a small allocation that is specific and tailored to the impact that you want to achieve. 

Universal goals for global development
The UN developed Sustainable Development Goals (SDGs), a universal set of goals/targets for global development, part of the 2030 agenda agreement from the UN Climate Summit. This is an initiative targeting action across 200 participating countries worldwide – in a bid for global action.2

Erik Kemper, non-executive Board Member at SBZ Pensioen, explained that the goals (established by the UN support-investors) are very useful for investors when navigating through impact investing. The themes covered can help investors understand the ways in which they can make a difference through their investments. 

The bottom line
Creating an impact portfolio that invests in private markets is making a difference, whilst also maintaining an attractive level of financial return. It enables clients to set customised objectives for achieving that specific impact. These objectives can be complementary to your wider portfolio.

Investing for the endgame - Investment management for mature, well-funded DB pension funds

The changing life-cycle of pension schemes
Historically, pension schemes have typically been focused on generating returns in a risk managed way. As schemes have become increasingly more mature, there is more focus on a third dimension; meeting cash flow requirements. 

In this session, we discussed the challenge schemes often face when trying to solve cash flow as it can sometimes lead to compromising on returns or by reintroducing risks that trustees thought they had solved for. 

The increased need for cash flow in today’s pension schemes
We believe that trustees should monitor investment strategies through multiple lenses. All trustee boards monitor their investment strategies by asset allocation. Most trustee boards monitor their investment strategies through a risk metric, for example, Value at Risk. Very few monitor their investment strategies through a risk lens against the scheme’s liabilities. As a fiduciary manager, we explained our unique position in that we have data on the scheme’s liabilities as well as complete transparency on the scheme’s assets. We outlined the importance of incorporating data from both sides of a pension scheme’s balance sheet to monitor the client’s investment strategies through all of these lenses, on a daily basis. 

So, what is the solution to generate cash flow requirements?
It is crucial to select assets that provide regular, known cash flows with a very high certainty of materialising. As such it’s no surprise that the core of the portfolio is highly rated corporate bonds preferably managed on a buy and maintain basis. Bonds would typically be sterling denominated and/or any overseas exposure would be hedged back to sterling.

The bottom line
The ultimate solution is one which blends publicly traded investment grade credit managed on a buy maintain basis with senior private debt to achieve scheme specific cash flows, retaining target returns and hedge ratios and importantly having the liquidity available to a buyout. 
We strongly recommend not constructing income portfolios in isolation, instead, they should be looked at holistically across the entire scheme, ensuring that the portfolio isn’t to the detriment of risk or return characteristics. We want to ensure that we continue to have the liquidity available at the point we expect to reach buyout, to allow our clients to transact.

Currency management in the age of Brexit and Trump

The importance of currency management
Looking back at the 31 October Brexit deadline and ahead to the 2020 US presidential elections, what does the landscape look like for sterling, U.S. dollar and the euro? Investors who invest internationally don’t have any choice but to think about currency, including the results of dynamically hedging, managing costs and maintaining appropriate governance.

Sterling and the euro are trading at low levels versus the U.S. dollar, now is a good time for European investors to assess the impact that currency exposures have on their portfolio risks. 

What keeps you up at night…
Will the UK ever leave the EU, will President Trump be impeached or will Salvini and other euro-sceptic politicians doom the euro?? During our session, we asked the audience when they think, if ever, Brexit will happen – 55% believe it will happen after the 31 January 2020.

All these scenarios are possible and will likely impact investors with international currency exposure. We highlighted the importance of evaluating the following in order to avoid getting distracted by continuous market noise: cycle – Brexit and European crisis weigh on the euro and sterling, valuation – sterling and euro are cheap versus the dollar and finally, sentiment – speculators are very bearish towards sterling. 

Three things you can do…to sleep well at night
We discussed the three golden rules to follow when managing a portfolio with international currency exposure. In a market full of uncertainty, volatility and constant market noise, it is important to follow these simple steps in order to effectively navigate through the ups and downs. 

Don’t take risks you are not paid for; Investors can’t afford to take risks they are not paid for. This is important because reducing unrewarded risk enables investors to invest in strategies that have a positive expected return. Passive hedging of international bonds can reduce risk by 70%.

Look for strategies that add return; Rather than relying on their traditional asset allocation, investors ought to look for strategies that add sustainable returns. Currency is often ignored as a return source. Dynamic hedging and absolute return strategies are compelling ways to manage currency for return.
Seek the best execution, Investors need to look for the most cost-efficient implementation of those strategies. Reducing costs is the only certain way to increase net returns.

Respecting the low-return imperative when it comes to currency management
We can reduce uncompensated risks by strategic currency hedging, add returns by tilting our currency exposures towards rewarded factors and save up to 95% in currency implementation costs by having a considered management process. 
 

Research under the radar: Move into the spotlight

Deriving out of potential strategies into the best in class
As we have a long-standing history pioneering professional manager research, this session will discuss some of those best practices. Today, our in-house team of manager research experts monitors more than 13,900 products and strategies around the globe, from which it selects just 258 products it deems to be best-in-class.

The search for the world’s leading investment managers
We discuss the importance of excellent in manager research selection today, as investors confront a low-interest rate environment, rising market volatility and a generation of retirees who cannot afford giving up potential return opportunities or weathering a shock in their portfolio. 

As a result, our manager research process is thorough, precise, objective and time-tested. It begins with unparalleled access to every key decision maker to form a deep qualitative evaluation of the manager’s people and process, before being validated by a forensic quantitative analysis of the manager’s portfolio and performance. A formal onsite operational due diligence is also an essential component to ensuring the integrity of the manager’s processes. 

The importance of proprietary and bespoke manager research
Hannah Evans explains that decades of proprietary data, analyst notes and decisions about thousands of manager products and strategies afford our manager researchers the perspective required to select some of the world’s best managers. Being privy to the intricate details of the inner workings of the firm, individuals and operations behind each product allow us to identify potential winning strategies early in their life-cycle and help our clients benefit from the first-mover advantage that often comes from seeding a strategy. 

What is the future of manager research?
When asked about the future of manager research, the panellists agreed that it is important to continuously introduce new tools and improve this cornerstone capability, as markets have evolved, client needs have changed, competitive pressures have shifted, and technology has developed. Integrating evaluations of managers’ ESG capabilities is just one of many such examples. The manager research team’s relentless pursuit for risk-adjusted return potential for clients is part of the DNA of the investment process. 

 

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.


1Source: 2019 KPMG, UK Fiduciary Management Survey
2Source: UN PRI. There are detailed sub goals within each of these categories (169 in total).