Introduction by John Hattersley Fund Director
uture
Investment Report 2015 / 2016
Introduction by John Hattersley Fund Director
6
As with most things risk is ever present in the investment world . It is just a fact of life . However , it needs to be recognised that not all risk is the same or even equally bad . It does take time to manage risk in whatever form it takes , though , and the investment world is notorious for devoting a lot of time trying to assess actual and potential risk . That does not mean , of course , that investors are good at assessing risks or , more importantly , discerning ‘ unknowable ’ risks . Having a bad track record doesn ’ t prevent forecasters and policy-makers from pouring significant resources into the task . How many predicted the 2008 financial crisis , for example ? How many have ever predicted a recession ?
Despite these limitations a pension fund cannot be managed without undertaking some sort of risk assessment and without indulging in some predicting . Without that analysis it would be impossible to achieve the investment returns needed to meet the liability requirements of the Fund . The art is to remember the scale of the limitations . Predicting the future against a backdrop of unrecognisable factors is probably futile anyway . The global economic landscape that prevails today cannot be found in any textbook or , indeed , in the historical experience of even the most seasoned investor . It is certainly unfamiliar .
Readers of previous annual reports will be aware of just how much investment markets have been distorted by central banks and monetary authorities as they have attempted to stimulate global financial recovery following the banking crisis . They were designed to pull forward in time the consumption of goods and accelerate asset price returns . Unfortunately , growth in the developed world continues to disappoint with the huge expansion in the levels of debt failing to deliver . Money creation , low interest rates and depressed bond yields have restored some confidence in the banking system but the real economy has not , as yet , seen the initiatives translated into recovery . This is partly due to the need to undertake politically unpalatable reforms being shunned in favour of more procrastination but it also reflects the unprecedented , and largely unrecognised , scale of the original crisis .
Just like last year investors continued to want to hear just good news . However , the increasing ineffectiveness of central banks ’ actions received more recognition and the number of commentators noticing that repeating the same moves whilst hoping for different outcomes doesn ’ t work grew . Although day to day market movements were dominated by the short term worries referred to in the Advisor ’ s Report , such as China ’ s slowdown , the dramatic fall in commodity prices , the strength of the US dollar , it was the wider worries which provided the backdrop and caused the uncertainty . As the year drew to a close most asset markets were beginning to look richly valued and , therefore , potentially vulnerable . There are indications that corporate profitability has peaked for this cycle alongside the ultra-low financing costs which have encouraged dividends and share buybacks . In this context circumspection seems to be appropriate .
Viewed against this background the Fund ’ s return of just 0.1 % versus -0.2% for its benchmark isn ’ t as disappointing as it first seems though we could have countered some of the issues set out above a little more effectively . Moreover , the long term track record remains strong outperforming its benchmark by 6.1 % versus 4.9 % over three years and 6.8 % versus 5.6 % over ten years .
The Fund favoured international equities ahead of other asset classes but as the new customised benchmark was implemented monies were switched into bonds . The Fund uses a specific bespoke benchmark for its index linked bond portfolio and most of the monies were redirected into that . High yield bonds were favoured ahead of standard corporate bonds . The weighting to property unit trusts began to be cut in accordance with the new target but this will overspill into 2016 / 17 .