COVID-induced volatility means investors must remain flexible – PLSA

Investors need to consider dynamic rather than static asset allocation and should implement robust investment processes to counter greater market volatility, following the outbreak of the coronavirus pandemic.

During the Pensions and Lifetime Savings Association's annual investment conference, investors discussed how the coronavirus pandemic has shaped their thinking about investment risks.

Bonds and equities are likely to start to move in correlation once inflation starts to increase, said Niall O'Sullivan, CIO Europe, Middle East and Africa and Asia for investment solutions at Mercer, who noted that these asset classes have in previous years tended to offset each other in terms of performance.

Investors should expect much more volatile investment conditions while returns will be lower following the recovery, Mr. O'Sullivan added.

David Vickers, CIO of Brunel Pension Partnership, Bristol, England, said that markets have already seen a V-shaped recovery in the past 12 months but he is not expecting inflation risk to increase in the short term. Brunel's local authority pension fund members have £30 billion ($41.5 billion) in assets.

Speaking on the same panel as Mr. O'Sullivan, Mr. Vickers warned investors against the dangers of inflation expectation risk rather than inflation manifesting itself.

The risk of anticipating inflation can prompt investors to get ahead of themselves and move into investments that offer inflation protection, such as real assets, without considering all the implications, he said. Instead, inflation-linked bonds could be a better option. "For the long-term ... that's a fine place to be," he said.

Positioning portfolios toward emerging market currencies could also make a lot of sense for investors as inflation protection, Mr. O'Sullivan said.

Investment officers also said that they would be keen to do more illiquid investing but they are facing barriers.

Marc Bautista, senior director, investment manager at Willis Towers Watson and lead adviser to the firm's £8.5 billion defined contribution multiemployer plan Lifesight, London, said that concerns over liquidity risk are not holding the plan back. "We'd like to introduce more illiquids into our portfolios," he said, adding that the firm is working with providers to overcome practical challenges, such as strategies in a portfolio that are housed on an investment platform.

Mr. Vickers agreed that investors are keen for the U.K. government to get involved and deliver more infrastructure projects that are ready to be funded, as the secondary market is overheated.

Speaking about ESG risks, Mr. O'Sullivan said that the cost of capital will continue to increase for companies that are not incorporating ESG factors into their decisions.

Mr. Vickers added that CEOs are now expected to understand the entire supply chain — the suppliers of their suppliers — and said that as more information is analyzed, "we will get more reputational shocks."