“With the football World Cup nearly here, the PPF 7800 Index fell behind over May, conceding 0.6% in funding level terms to finish at 94.5%, having ended April at 95.1%. It was the proverbial “game of two halves” for markets in May, as growth assets continued to rally and bond yields rose for the first couple of weeks, before giving all these gains back in the last 10 days. Political turmoil in Italy, US tariff announcements on metal imports, and ongoing trade tensions between the US and China resulted in a sell-off in markets towards the end of the month.
“Developed market equities continued their positive momentum until the sell-off, driven by strong US data and a weaker pound, but emerging markets suffered badly from the fallout of the trade tensions and a stronger US dollar. UK gilt yields rose over the first half of the month which will have been welcomed by pension scheme trustees as their liability values should have fallen. Many of our clients took advantage of the rise in funding levels – indeed the PPF 7800 Index funding level might have touched 100% for the first time in over seven years mid-month – by de-risking from growth assets into matching or hedging strategies. Those schemes who had a de-risking framework in place will be enjoying their half-time oranges.
“We expect markets to remain volatile, and pension schemes should ensure they have a balanced squad of assets to tackle the challenges ahead. While we expect bond yields to bounce back and rise further over the rest of 2018 and beyond, schemes can’t rely on this to win (funding level percentage) points. Protecting against surprise falls in yields is key and appropriate defence in the form of LDI strategies remains important. Even in this rising rate environment, the 2071 conventional gilt syndication mid-month attracted record demand, being 6.5 times oversubscribed, providing further evidence that gilt yields remain anchored at the ultra-long end.
“In attack, having a diversified strike force of equities, both developed and emerging markets, and a variety of credit related investments remain important. And what about “supersubs”, 20 years on from Michael Owen’s famous impact? Schemes should consider their own fast-moving, high-returning allocation by using alternatives, from liquid strategies like hedge funds through to more stable, “secure income” assets to help them churn out results. In a rising rate environment, with credit spreads remaining tight and capital requirements constraining banks, the illiquidity premium available from investing in these assets remains attractive.
“Whether a scheme is still in the group stages or close to lifting the trophy of achieving its funding objectives, it’s important to have the right team in place – from advisers, trustees and sponsor covenant through to a tailored investment strategy and structure which is nimble enough to take advantage of market movements.”
|
