Author: Joanne Frearson
Asset owners have a lot to think about at the moment as we experience one of the most severe economic contractions in history.
However, John Greaves, CFA, Head of Investment Strategy and Research at RPMI Railpen believes decision-making should not be any different because of the coronavirus pandemic.
By having cognitively diverse teams and thinking long-term, he thinks it is possible not to panic and rebalance amongst the turmoil of this crisis.
Challenges facing asset owners
“There aren't many investment strategies that wouldn't have been effected by the market movements we've seen,” says Greaves.
Many asset owners, he explains are sitting on losses in their portfolios, although markets have recovered a little bit, the near-term outlook is really uncertain.
Stakeholders are in the front of Greaves’ mind at the moment. He has had a lot of interaction with them about the situation, reviewing positions and looking at things for the long-term.
What does the long-term investment horizon look like?
Greaves explains each asset owner has different objectives for the future as well as investment timelines.
“We are fortunate as a pension scheme we can look really long-term and it is genuinely possible to look through this period of market stress,” he says.
But for other investment horizons, Greaves is far more watchful.
“We have various frameworks to help us think about the future and ultimately the level of risk adjusted returns you expect from different types of asset classes,” he says.
He explains investors need to ask themselves whether the outlook for growth and inflation has materially changed.
“What we're seeing at the moment as we are living through one of the most severe economic contractions in history,” he says. “It might even break records, sadly. The world as we know it has just stopped.”
Demand for goods and services have plummeted. He says: “Is that temporary? Does the demand get pushed out? Are we seeing a permanent shift down in productivity?”
Greaves is not pushing too much weight on a permanent reduction in productivity yet, but he sees downside in a world of very low interest rates. It stops companies failing, he thinks this is one of the reasons why this economic cycle has been weak.
“We haven't had that cathartic cleansing of companies that are perhaps not particularly productive and that capital hasn't been redistributed to other companies.”
The impact on sustainability
Greaves is also concerned that low oil prices could reduce sustainability initiatives, as companies will not have the economic incentives to transition to a clean energy economy.
He says: “Someone needs to fill that gap and step in and provide those substitutions, because if you look at history any sort of energy transition has not happened until economic incentives are there.
“That is one to think about. Asset owners have a role to play in terms of engaging with the companies about their plans to support the energy transition.”
How is the crisis impacting decision-making?
When it comes to decision-making he does not think that should necessarily change in a crisis.
Although he says: “it definitely focuses the mind when you see your assets moving up and down and your stakeholders panicking.”
He feels by having cognitively diverse people in your team it can help make decisions, which are not rash.
“It is really important to have some people who have their heads up, thinking about the long-term and have a different kind of mental profile,” he says. “They are seeing the elephant in the room.”
To find out more about these issues, here are the key areas to watch [timestamp in brackets]:
Challenges facing asset owners [0:00-1.28]
What does the long-term investment horizon look like? [1:28-5:15]
The impact on sustainability [5:15-8:09]
How does it impact decision-making? [8:09-9:35]
This video was recorded over Zoom on Friday 24th April.
