Pension fund and money management executives are coming to terms with the U.K.'s momentous decision to leave the European Union, embracing the opportunities that volatility is presenting but doing so with serious concerns and questions about how to move forward.
U.K. voters' 52% call to leave the union, announced early June 24, shook markets across the globe. The FTSE 250 dropped more than 7%. The pound sterling fluctuated throughout the day, dropping more than 10%, to $1.35 in reaction. The DAX fell 6.8%, Euro STOXX 50 was down almost 9%, and the Nikkei 225 dropped 7.9%.
With an initial reaction to the June 23 vote of shock, pension fund and money management executives agreed in the hours after the vote that they now have serious, long-term issues to consider.
“We had seen the euro trading bloc as an improving area long term that we could invest in — we have been feathering into Europe a little bit starting last year,” said Christopher J. Ailman, chief investment officer of the $187.4 billion California State Teachers' Retirement System, West Sacramento.
Regarding “the momentum we had toward the U.K. and Europe, this definitely causes it to wane. Where we thought we were seeing a future of opportunity long-term ... vs. Asia and the U.S., we will reassess that very much so.”
The long-term impact to CalSTRS is “fairly profound,” Mr. Ailman noted.
CalSTRS' asset-class directors met June 24 with their portfolio managers to review the situation, he said, adding he will meet with those directors on June 27.
“We know our exposure to the U.K. and Europe, but we will really look at the granular level, particularly the real estate and private equity” investments, he said. While changes cannot be made overnight to private equity funds, executives could use “price fluctuations as an opportunity, but also to be more diligent on the risk. For infrastructure, with any of our long-term investments, we need to pause for reflection and thought. It has a long-term impact on the U.K. — London was, to us, really the financial center of the world. Is that going to change?”
As a long-term investor, CalSTRS looks at “megatrends,” he said. “To use a California phrase, we look for big waves that we can ride for a long time.”