On the go: Volatility and uncertainty caused by the coronavirus pandemic mean pension schemes should focus on diversifying their investment portfolios, while maintaining appropriate liquidity, according to SEI Institutional Group.
Alistair Jones, client strategy director at SEI, said the “true benefits” of diversification are only realised “when markets experience significant volatility”.
“Going into any crisis with a broadly diversified portfolio can protect you against the extreme swings and ensure you aren’t overexposed to any one asset class, stock, sector or geographic area,” he said.
Within asset classes, it is beneficial to diversify across investment styles such as value, momentum and macro, said Kris Shergold, regional director at SEI.
“The highest level of transparency is in public market equities and debt. But it is entirely possible to have a strong enough understanding of the asset classes and investment styles, strategies and holdings of your alternative asset managers to make informed decisions,” Shergold said.
It was announced in the Budget on March 3 that the government would launch a consultation aimed at supporting the UK economy with pension assets post-Covid.
Chancellor Rishi Sunak said the government is “taking steps to give the pensions industry more flexibility to unlock billions of pounds from pension funds into innovative new ventures”.
According to Budget documents, this consultation will analyse whether certain costs within the charge cap, set at 0.75 per cent, affect pension schemes’ ability to invest in a broader range of assets.
The goal is to ensure that pensions schemes are not discouraged from such investments and are able to offer the “highest possible return for savers”.
SEI said another lesson learnt from the heightened volatility and uncertainty caused by Covid-19 was the need for pension schemes to have access to timely and complete investment data.
Data requirements for pension schemes are such that they should seek to obtain as close to real-time data as possible on as many investments as possible, since this supports “intelligent liquidity profiling” when markets are volatile and unpredictable, Jones said.
He added that it is essential for pension schemes to have a complete, pre-agreed journey plan to adjust their strategic asset allocation with their service providers with an agreed set of actions if a trigger is met, and scope to deviate from the plan if the circumstances warrant this.
