Editorial: What a fortnight for pension fund investors. As China failed to stem its stock market rout, bourses the world over shed points as concern peaked that the brakes were being put on growth for the economic powerhouse.
The ripple effect of the correction has been far reaching, with China’s neighbours suffering a particularly big hit and its trading partners taken on a rollercoaster ride after China’s surprise move to devalue the renminbi. It was no holiday for some.
But the events were a hyperbolic demonstration of what was already pretty well understood – that everyone is touched by China and its actions have the power to cause convulsions across global markets.
It has also raised at least two key questions for long-term investors such as pension funds.
Illustration by Ben Jennings
First, what does this mean for schemes’ risk-asset exposures? And second, how does the change in investor sentiment affect monetary policy and schemes’ positions on interest rates?
On the the first point, many in the industry have been eager to cling to the buoy that stipulates long-term investors need not panic.
It is also a reminder that the equity rally cruise that many schemes had enjoyed over the past couple of years is for now at least over.
Those with a robust derisking plan – as demonstrated by Kingfisher in this week’s cover story – will have locked in those gains and shifted into matching assets.
But for those who have not, the received wisdom is to hold fast through the volatility and rely on the equity markets’ ability to smooth returns over time, perhaps picking up some cheap assets along the way.
The big second question for schemes is what to do about interest rates. With the Fed’s (and subsequently the Bank of England’s) near-term plans for a rate rise being all but snuffed out, some commentators had suggested that perhaps schemes could afford to unwind their hedging positions.
But with gilt yields remaining low, perhaps the best course of action is a liability-driven investment strategy that hedges some risks but still allows schemes to benefit from return-seeking components.
Maxine Kelly is editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert
