Have we turned into a lemming?

Earlier this year, I found myself in a spat in the FT comment columns because I offered some investor sentiment data (as usual from my friends at CrossBorder Capital) which was at odds with the Bank of America (BoA) Fund Managers’ survey. As a reminder, BoA’s is a subjective survey of 174 (this month) large institutional investors’ investing intentions, whereas the data we use at Linchpin is an objective measurement of all financial assets.  We don’t know who owns them but if the aggregate held in equities is a relatively high weighting (for example) we’d expect that to revert to the mean in due course, much as a portfolio manager overweight in equities relative to his/her benchmark will find a way to bring it back in line. Today the main sentiment messages from both data sets are more similar: risk appetite is declining but investors are still overweight equities and underweight bonds.  They are weighted towards US equities, Japan is also favoured, and there is convergence in the expectation that economies will slow down and that US treasury yields are expected to rise further. At Linchpin we share the sober view about the economic outlook and are likewise concerned about rising bond yields.  We are probably not far from the consensus in our view that equities need to go through a market correction of some sort in the near future.   As natural contrarians, however, we are not particularly comfortable being with the masses.  We begin to think that our fears or hopes are already discounted.  Having said this - unlike many - we are firmly of the view that Emerging Markets are likely to be the best performers over the next downturn.  It is an interesting reflection that over the 2008 Global Financial Crunch that was also the case, at least until central banks i) succeeded in stabilising the financial system and ii) continued to print money.  We’d expect the same to happen this time round. If you think we are turning into another lemming, please tell us.  If you would like to find out more about CrossBorder’s investor sentiment data, please click here.​

Mukesh Malhotra attends Vanguard Investment Symposium

On 17th October 2018, Mukesh attended the Vanguard Investment Symposium in London.

Upcoming events

Please find below some upcoming events our team members will be attending:  2nd November 2018 - Professional Pensions LDI breakfast roundtable - London - William participating 13th November 2018 - LPFA Employers Forum - London - William attending 20th November 2018 - Aberdeen Standard Investors Conference - London - William attending 21st November 2018 - Investing with Impact Summit - London - William attending 23rd November 2018 - East Sussex Pension Fund Employer Forum - East Sussex - William attending 6th - 7th December 2018 - The LAPFF Annual Conference - Bournemouth - William attending 17th - 18th January 2019 - LGPS governance seminar - William is participating in a roundtable on responsible investing​

China smelling of roses?

One of our themes over the past few years has been to pay more attention to China when trying to predict the future market environment and less to the USA.  That’s not just because the Chinese economy is now 70% the size of the US (compared to just 11% in 1997) and its central bank’s balance sheet is 1/3 bigger than the Federal Reserve.  China has also been extending its hegemony across the world in many ways, from its Belt and Road infrastructure vision across western Asia to its policy of encouraging use of the yuan rather than the US$ for global trade contracts. The contrast between the monetary policies of the two countries is particularly stark right now.  The Federal Reserve, followed by most ‘western’ nations, is running very tight policy, whereas the People’s Bank of China and most Emerging Markets (EM) are relatively loose.  In data terms, provided by our friends at CrossBorder Capital Limited as at 30th September, the DM index is at 6.5 (range 0-100) whereas the EM is at 54.7. For markets this has a strong implication that the US$ is likely to strengthen against the Chinese yuan, because other things being equal central bank easing equates to more supply.  We’d expect the Japanese yen to move somewhere in between the two, as another long-held thesis of ours is that Japan’s orbit is now at least as much influenced by China as America. It is also a much more positive background for EM.  Many commentators assume that the strong US$ will continue to be a negative for them, but we’d comment that yuan weakness will be a just as large, if not larger, positive for them (and incidentally Japan).  We also note that crossborder flows into EM have rebounded sharply since the low point in June 2018, suggesting greater confidence than newspapers would lead readers to believe. Given the dire liquidity background just now, we continue to expect a more substantial correction in markets than we saw last week.  If China continues its current loose monetary policy, those countries connected to it economically may just come out smelling of roses, at least in market performance terms. To learn more about CrossBorder’s research on liquidity please click here.​

Charities and climate change

As responsible investors, pension funds are expected to take Environmental, Social and Governance issues into consideration when investing.  The buzz word today is sustainability and the theory is that as long term investors it is in their financial interest to invest in sustainable business models. Pension funds have regulatory frameworks and guidance such as last year’s Law Commission report, which they can use to distinguish between decisions taken for financial as opposed to non-financial (call it ethical if you will) reasons.  Fiduciary duty has to predominate, including taking sustainability into account, but non-financial reasons are permitted if certain tests are passed. Charities and endowments operate under the Charity Commission’s investment guidance CC14 and may legitimately choose to place their charitable objectives above financial returns.  They seem, however, to make heavier weather of this distinction.  Witness the Church Commissioners’ latest wrangle over Amazon and the departure of the University of Cambridge’s top investment team over climate change. Charities already have to identify clearly where they are making Programme Related Investments (PRI), ie. those done in pursuit of their charitable objectives.  They are also likewise able to not invest in certain companies for non-financial reasons if they are in conflict with them.  In our view, where neither of these is the case, charities and endowments should be following similar guidelines to pension funds.  For example, taking climate change issues into account would be obligatory but divestment from fossil fuels without consideration of the financial impact would not be – unless of course that were in alignment with the charity’s charitable objectives.  Some Trustees and University Council members may be less than clear about their duties on this front. Linchpin Advisory Limited provides investment and governance advice to both charities and pension funds. To learn more please click here.​

Mukesh Malhotra attends European Sustainable Investment Summit

On 9th October 2018, Mukesh attended the European Sustainable Investment Summit in London.

William Bourne attends Nottinghamshire Local Government pension fund agm

On 4th October 2018, William attended Nottinghamshire Local Government Pension Fund agm in Nottingham. 

LGPS is close to full funding in aggregate but will contribution levels still have to rise?

The 2016 Section 13 report on the LGPS by the Government Actuarial Department is at long last published.  It provides a more consistent basis for comparison between funds and follows the ‘dry run’ published in 2017 on the 2013 valuation.  One major purpose of the Section 13 report is to review the long-term viability of the Scheme and highlight where measures need to be taken.  Given benign asset markets and higher contributions, it is no surprise that there has been a marked improvement here.  On GAD’s best estimate basis (without the level of prudence embedded in local actuarial valuations), the LGPS as a whole was 106% funded in 2016 and roughly 2/3 of individual funds had funding levels of over 100%.  Since March 2016, of course, funding levels will have risen substantially higher. The second purpose of the report is to promote consistency so that comparisons between funds are easier.  Here their major comments are aimed at the four actuarial firms who serve the LGPS, and they focus particularly on the range of discount rates and mortality contributions used.  Their major point is that these seem to be done not on justifiable local differences but simply according to which actuary is used. The report distinguishes between ‘presentational’ and ‘evidential’ consistency.  It is hard to argue against the former and GAD suggests a dashboard approach.  The latter is more complex: the actuaries argue with some reason that enforcing a single methodology would reduce innovation and evolution.  We would also argue that there is some systemic risk if all actuaries are forced to use the same model, as they have for example in the private sector. The Section 13 report also provides an Asset Liability model to try and identify whether contributions might need to go higher.  It concludes that in about 75% of scenarios there will be a rise.  However, this is based on explicit assumptions which we would argue are unrealistic, primarily that the conditions prevailing in March 2016 (ie. extremely low bond yields and, after seven years of QE, very low asset price volatility) would continue.   With asset prices nearly 20% higher, gilt yields no lower and secondary contributions falling away, we would challenge the report’s assertion that higher contribution levels will be needed generically.  If the GAD report does turn-out to be correct, and contributions have to rise when the Scheme appears fully funded, top class employer communications are going to be vital.