Pension fund executives called on peers at an annual investment conference to be aware of the need to be on the right side of investment trends, including an ESG focus, as they deliberated over the challenges they are facing in 2019 and beyond.
Speaking at the Pensions and Lifetime Savings Association's investment conference March 6-8 in Edinburgh, asset owners agreed that diversification might not be as straightforward a job in the current macroeconomic environment.
"We are quite late cycle and there are quite a few imbalances. It's difficult to be defensive in a portfolio overall if gilts and cash (are) giving you negative return (over) a 10-year period," warned Daniel Booth, chief investment officer of Border to Coast Pensions Partnership, Leeds, England, a £46 billion ($60.7 billion) pool of U.K. local authority pension funds.
"Even though you know a recession is coming, it's not easy to know what to practically do about it," Mr. Booth said.
During the same panel discussion, Jo Holden, chief investment officer for the U.K at Mercer, called on pension funds "to think what they want to avoid ... (such as) disinvesting at the wrong time or being overreliant on one asset class."
Ms. Holden added: "Doing an analysis around cash flow ... really looking at multiple sources of alpha and contractual income" could help pension funds prepare.
Speakers also agreed they were concerned about the buildup of debt to GDP in the global system. "Balance sheets of U.S. companies are very stressed — cash flow is just enough to pay interest payment. For a small percentage of the largest mega-cap companies it is not that high … but for the remainder of all companies out there, we are already at levels we have seen in 2008," Roelof Salomons, chief strategist at Kempen Capital Management NV, said during the same panel discussion.
"But margins are much higher and interest rates are much lower than (they) were at that time," Mr. Salomons said, adding, "You'll get your coupon but it's not good for the economy."
"I was concerned in November and December (when) markets were getting illiquid," Mr. Salomons said. "The recession is now most likely (going to happen in) 2020 or 2021" after a strong rebound to the beginning of 2019, he said.
U.K. investors will also face the effects the U.K.'s exit from the European Union on gross domestic product. Paul Johnson, director of the Institute for Fiscal Studies, said during a keynote address that the forecast of real gross domestic product in the U.K. in 2018 was 14% lower than expectations 10 years ago. This gap could widen to 20% after Brexit, he warned.