Schroders Autumn Conference 2015
The thread running through this year's conference was the need to be prepared for the unexpected, in an increasingly uncertain world.
Another strong turnout of advisers and employers made the journey to our Autumn Institutional Conference at London’s Savoy Hotel on 29th September. The thread that ran through our deliberations was the need to be prepared for the unexpected in an increasingly uncertain world. This theme was underlined by an economic background in which we believe the risks are swinging more towards deflation than inflation, as financial conditions tighten and the threat rises of a “hard landing” for the Chinese economy. Here’s a brief summary of our discussions.
Investing in the long term, for the long term
There could be no better reminder to investors of the need to keep environmental, social and governance (ESG) factors in mind than the current problems of Volkswagen. As the evidence mounts that ESG investing can make a difference, the pressure is growing:
- There are signs that climate change concerns are spreading out from “millennials” (those born around the turn of the millennium) into the mainstream.
- External influences are increasingly important: for instance, the Law Commission, the Department of Work and Pensions and the Financial Reporting Council are all currently looking at fiduciary duty and stewardship.
- At Schroders, we regularly research a wide range of ESG issues, from the El Nino effect and cyber security to the decline in bee populations, and we try to engage with and encourage an increasing number of companies on these topics: 350 this year alone.
The asset management industry still has a long way to go, but ESG is growing out from equities to embrace other assets, such as fixed income, and new geographies, such as Japan. Schroders is determined to remain in the vanguard of this push.
Bonds – is the great bull market over? Do bonds still have a place in your portfolio?
Whether it be slowing growth, ageing populations or rising income inequality, many of the drivers of low interest rates are here to stay.
- The market expects interest rates to remain below the “neutral rate” – the rate consistent with full employment, trend growth and stable prices – until after many of us are dead.
- Even so, bonds offer advantages not always available elsewhere: diversification (all the more so in a world of diverging economies), liability management and even attractive absolute returns, if asset owners allow their managers sufficient leeway.
- Central banks are looking increasingly fallible in their ability to manage the global economy at a time when national economies are diverging and inflation pressures are still weak.
Bonds are still vital in a balanced portfolio to protect against both deflation and lower growth. Moreover, credit is starting to look interesting right now, after the recent spread widening, but investors need a strategy that allows them to adopt regional positions if they are to be successful.
Schroders Retirement Benefit Scheme – our journey
We realised 10 years ago that our defined benefit pension scheme needed to adapt to a difficult background characterised by a long-term fall in yields. Thus began a journey:
- We recognised that, by treating the two sides of the balance sheet separately, we had ended up with a severe mismatch between assets and liabilities.
- We knew that governance was vital if we were to successfully change direction: trustees, the employer, our consultant, and the fund managers all had to concur in the big decisions.
- We replaced our strategic benchmark-constrained portfolio with a more diversified multi-asset growth strategy, accompanied by a liability matching portfolio that now hedges 70% of the risk.
- Together with an outcome-orientated self sufficiency target of 123% funding, this still left open the possibility of benefiting modestly from a rise in interest rates, while limiting downside risk.
- With a funding ratio now comfortably above 100%, we are much closer to our target and are shifting the portfolio’s focus to wealth-preservation to de-risk when we can.
- Consistent with our wider perspective on the defined benefit side, we have also allocated significantly more time and analysis to our defined contribution plan in recent years.
Our journey has involved identifying the real risks to the scheme and, recognising we can’t foretell the future, to create portfolios that are better able to adapt to the environment as we find it. The result is a much more robust strategy that should vastly reduce the “funnel of doubt” about future funding.
Mark Stevenson, Futurist
Mark took us on a roller-coaster tour of the future, looking at some of the extraordinary and rather frightening inventions that are already under development.
These ranged from ultra-cheap genome sequencing for all and an “immortal gene” that could massively extend human life, to technology that can turn carbon dioxide and water into petrol!
This is turning upside down the existing social, technological and business infrastructure. For instance, in India, “crowd-sourced” drugs are bringing down the cost of developing a new treatment from $2.6 billion to $15 million. It is hard for companies whose business is based on existing structures and technology to adapt to this rapidly changing environment, but his message was that they will need to if they are to survive.
Sean Davoren, Savoy Butler
Maintaining the utmost discretion, Sean led us on a fascinating trip behind the green baize door to give us a peek at what the Butler really saw. In his ever-elusive search for perfection, Paul sits on toilets to get a “guest’s eye” view of bedrooms to make sure all is as it should be and still presses newspapers to ensure a crease-free reading experience (but tabloids only).
He will track down zebra milk for “the gentleman with the younger wife” and arrange a £35,000 shopping spree in the comfort of their bedroom for ladies who lose their luggage en route to the hotel.
Even supermodels with a certain reputation to maintain can be accommodated. One lived up to it by requesting a bath in goat’s milk fresh from the animal. Sean rose to the occasion, requisitioning a chauffeur for a £700 trip down the M4 to collect the milk, and then 40 bottles of Evian water to rinse off the results.
If the secret of service is minute attention to detail, delivered with personality and passion, Sean is clearly its living embodiment.
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