Opinion: Attractive asset classes
Many pension schemes have seen funding levels fall significantly in response to the crisis. However, the volatility in markets has left some asset classes looking more attractive for schemes.
Financial markets have been hit by two impactful events in quick succession, the COVID-19 outbreak, and the less-publicised oil price war. The combination of these events has caused extreme volatility in financial markets, the level of which has not been experienced since the Global Financial Crisis.
In addition to the tragic human impact, these events have inflicted heavy losses across risk assets and investors have flocked to ‘safe haven’ assets:
- Equities have been the hardest hit asset class. It took less than a month for equity markets to fall from record highs into a bear market. Sectors such as airlines and hospitality have suffered the sharpest and deepest declines.
- Credit spreads have widened dramatically and at an unprecedented pace.
- The COVID-19 outbreak has pushed government bond spot rates to record lows.
Strategic opportunities
Pension schemes have suffered as a result with funding levels falling, modestly in some cases and much more significantly in others. But the chaos in the markets has left some asset classes looking more attractive.
For schemes that have the liquidity and capability – or can create it – these present the opportunity for making investment changes to rebalance their portfolio and mitigate their losses and improve journey plans and security for members.
To highlight two areas that may already be worth considering:
- High-quality credit - increased spreads provide good risk adjusted returns, even after anticipating significant increases in defaults.
- Opportunistic capital - due to forced sellers and reduced liquidity levels.
Other asset classes such as Distressed Debt or Real Estate Secondaries also have potential as investment areas depending on how the crisis unfolds. Trustees should be alert to future developments and ensure they have the right governance framework in place to act quickly and make future changes.
Although it is difficult to predict the exact triggers for future change, asset class re-pricing is likely to be driven by a combination of:
- even more uncertainty about the impact of COVID-19 such as a second or third wave of cases and data showing the impact on the real economy;
- defaults starting to feed through the system; or
- cash markets struggling for liquidity.
The suitability of these investments will depend on the specific situation of your scheme. If you would like to discuss how to get the best outcomes for your scheme and scheme members, please contact us.