Estimated reading time: 4 minutes
Now that the dust has settled, it seems a perfect time to reflect on the discussions of our 2020 Investment Conference series, which saw a record turnout of almost 500 attendees across four cities. To say we covered a lot might be an understatement...
The conferences allowed us to look back over the last investor-friendly decade before looking ahead at the challenges looming throughout the next year and beyond. DB schemes have to contend with increasing cash outflows whilst DC schemes, faced with the opposite challenge, are being pressured towards consolidation by increased regulation.
Some of that regulation relates to ESG. Last year saw schemes having to formulate and set out their policy on ESG and climate change. This year will see schemes setting out how they have implemented that policy and monitored their investments accordingly. The evidence from our polls, taken live at the conferences, suggested attendees were aligned with our own thinking – that ESG is far more than simply a compliance issue.
"Last year saw schemes having to formulate and set out their policy on ESG and climate change. This year will see schemes setting out how they have implemented that policy and monitored their investments accordingly."
Another lively area of discussion was whether trustees (and other investors) can simply invest passively so as to benefit from the proactivity of others. As we heard throughout the discussions, there are certain things that trustees simply cannot delegate. I do not think they can delegate responsibility for how they are choosing to make money for their members.
Continuing the theme, passive investment will remain a valuable tool for investing members' savings. While this has long been the case, as we look towards the new decade it is even more important to recognise that you are responsible for actively choosing the index you are passively tracking and influencing your investment manager’s behaviour.
We have long talked about the structural issues with market cap-weighted benchmarks in terms of country and sector concentrations. By allocating in line with market cap, we are implicitly choosing to back the winners from the last decade – these are the companies that have grown to the highest valuations and hence make up the larger parts of the index.
Fortunately past performance is a good guide to the future* so this is a good way to structure a portfolio.
Climate change, or more accurately actions taken to prevent/mitigate/exploit it, is changing the outlook for entire industries. It is also influencing the attitudes of investors, with concerns about stranded assets becoming increasingly prevalent. Given this, does a fundamentally retrospective capital allocation approach remain optimal?
The best way of summing up this issue comes from a slide (illustrated below) of one of our guest speakers, Nico Aspinall of B&CE. As Nico said, while there are many DB schemes that hold carbon intensive assets that they will need to sell to pay pensions, there is no guarantee that DC schemes will have the appetite to purchase them.
With global pledges on reducing emissions, it is a matter of when, not if, these companies end up with assets they cannot exploit. Undoubtedly there will be some who are willing to try to time their exit to perfection. For the rest of us, the big win is to make sure we aren't the ones left holding the assets as they fall in value. As one speaker highlighted, there are strong parallels here with LDI adoption across DB pension schemes.
The conferences have left us with a lot of possible actions to take over the next twelve months, but I recommend you at least make sure you understand how your passive assets are invested and whether there are simple adjustments you could make to start to mitigate the impact on your members' assets.
Finally, I wanted to again thank those who joined us to make these events such a success. We have already started to think about next year (looking at larger venues!) and will make sure next year’s conferences continue to build on those of recent years.
*Not really of course (just in case compliance are watching!)
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