Pension plans prize ‘portfolio resilience’

Pension plans now prize “portfolio resilience” over anything else, according to a new report from CREATE-Research and European asset manager Amundi Investment Management. 

The report surveyed 158 respondents from 17 pension markets across public and private sectors, which collectively managed €1.96 trillion ($3.18 trillion) of assets. 

The aim of the research was to shed light how pension plans worldwide were responding as the world economy struggled to recover from the COVID-19 pandemic.  

According to 85% of respondents, financial markets would have a W-shaped or even an accordion-shaped recovery. 

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Most respondents felt it was likely that central banks would lose their independence from their governments (84%) and inflation will follow deflation after the current crisis is over (77%). 

Also, the overwhelming majority of those surveyed believed asset returns will be lower this decade than the previous ones (90%).  

Professor Amin Rajan, CREATE-Research project lead, said: “Assessing the macroeconomic damage of COVID-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to pension plans”. 

Of those surveyed, 75% said they would target private markets to achieve custom-built resilience, whereas high-quality cash flow compounders among global equities would top the asset allocation choice for 76% of respondents looking to build “antifragility” into their portfolios. 

Since sovereign bonds were expected to make minimal total returns, risk tools would rely overly on other means.  

Greater scenario planning would be the preferred approach used by plans to manage risk in portfolios over the next decade (61%) whilst almost two-thirds (57%) would rely primarily on liquidity management. 

Diversification would remain a massive cornerstone in investing – be it based on asset classes (55%) or risk factors (54%). 

Pascal Blanqué, Amundi group chief investment officer, said: “COVID-19 has forced Governments and central banks to embark on a ‘whatever it takes’ wartime-type monetary response. The long-term impacts on financial markets only become evident in hindsight. Faced with such uncertainty, portfolio resilience and antifragility will be the new guiding star for pension investors”. 

The survey said five asset classes would be favoured for income: infrastructure (58%), US investment grade bonds (44%), emerging markets (EM) investment grade bonds (41%), private debt (38%) and European investment grade (36%).  

As for inflation protection, equities and infrastructure would be favoured again; commodities and real estate debt much less so with only 4% and 29%, respectively.  

Sovereign bonds would be favoured by a small minority (18% for US government bonds and 17% for EM government bonds) and only those with good funding ratios that permit a high degree of portfolio de-risking. 

When it came to environmental, social and governance (ESG), 52% said that sector of their portfolio performed best while 45% said it performed the same. 

“Furthermore, the long ignored middle child of ESG, the ‘S’ factor, has come into its own as COVID-19 has exposed low wages, precarious jobs and labour exploitation in frontline occupations – especially in the retail, transport and medical industries,” the report said.