14 May 2018 - Estimated reading time: 20 minutes
Welcome to our spring edition of Investment Perspectives
Rather like transfer deals in the English Premiership, prices were already a touch eye watering, but continued to go higher anyway in 2016 and in 2017. For 2018 it’s all change, with the start of the year posting negative returns on equities (especially UK equities) and government bonds. We have been saying for some time that it would be hard for equities to make much headway while bond rates normalised (whatever that might mean in practice), and there was always the risk of a policy mistake or a jump in inflation to scare the market. February was a gentle reminder that markets can be volatile and that equities and bonds can both go down at the same time. For now the trajectory of markets appears to be “stable”.
With this backdrop, following Graeme Johnston’s review of markets, we look at two opportunities that can be used by trustees to help achieve more predictable outcomes:
- Recognising that many pension fund trustees would prefer to have a little more certainty in their equity returns, we take a look at the use of equity option strategies to control outcomes; and
- With many pension funds having already turned to private corporate lending as a source of more predictable but high yielding returns, Claire Cairney takes a look at real estate debt, which offers an alternative source of credit and illiquidity premium across the full range credit risk from senior secured investment grade to mezzanine.
Away from the markets, there are plenty of regulatory issues affecting pension funds. One to look out for is the CMA investigation - the CMA has started to report back to the industry ahead of the final recommendations. This will lead to some important changes to the way in which our industry operates and we will be commenting on this in future Investment Perspectives as we see more detail from the CMA.
Another key regulatory change is MiFID II, which has come into effect from the start of 2018. One of the many areas this covers is the reporting of all costs by asset managers. Specifically relating to DC schemes (for now anyway), the FCA has also released guidance on disclosure of transaction costs. William Chan, who leads our DC investment research, provides more background to the challenges around calculating transaction costs and interpreting disclosures in our fourth article.