How you can prepare for tougher markets

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Johanna Kyrklund, Chief Investment Officer and Head of Multi-Asset Investment, Schroders

Economic, market and regulation challenges mean the future is likely to be more difficult than the past. Here’s one way that pension funds can overcome these obstacles.

We know that a combination of economic, market and regulation challenges are likely to make navigating the future more difficult than the past.

Here, I suggest a way that pension funds can overcome these challenges, based on my experience of multi-asset investing.

Get the ground work right

Before setting out on any journey or project, it’s important to agree what success looks like. Setting expectations, aligning goals and agreeing realistic time frames are an important part of this process.

It’s critical to be honest about return expectations, particularly if they are too optimistic. Our expectations for the decade ahead are that both equity and bond returns are likely to be lower than the last 10 years (figures 1 and 2). Recognising this may mean a difficult conversation with a fund’s stakeholders, but it is better to do this before returns deteriorate, rather than after.

Figure 1: The future is different, there is a need to adapt to a new reality

Figure 2: The gap between future and past is even greater for sovereign bond markets

Source for both figures 1 and 2: Schroders, December 2018. the forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue.  Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors

Asset owners are increasingly investing in less familiar asset classes or incorporating ESG into their investment frameworks. As a result, it is important to ensure that the resources available are consistent with ambitions and that the timescale is consistent with the investment. In the case of ESG, this involves establishing a framework to incorporate ESG effectively, including setting objectives, parameters and limits to the extent of ESG integration. This is also likely to require asset owners to move beyond simple screening and stock selection approaches and take a holistic approach to the measurement of sustainability. (For more on this topic please see our research here).

Finally, evaluation of performance should be transparent and there should be accountability in the review and feedback process. Transparency and accountability are key pillars of our multi-asset investment process and they should also act as guiding principles for asset owners in their manager selection and evaluation processes.

Conclusion

Acknowledging that it will be harder to generate good returns in future is one thing but knowing what to do about it is another. It’s not just about numbers and analysis. Ultimately, people and their leaders will have to manage through this and I firmly believe that it is their wellbeing (and a supportive environment in which to work) that will be the answer.

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