IPE Views: NAPF Investment Conference diary
IPE gathers a few tidbits of news from last week’s NAPF Investment Conference in Edinburgh
Vorsprung durch … service industries?
The UK economy could be larger than that of Germany in 20 years’ time, thinks Gerard Lyons, chief economic adviser to the Mayor of London.
His address to the NAPF Investment Conference was judiciously balanced and diplomatically agnostic on whether the UK should stay in the European Union, but either way, the City’s view is that we need to maintain good relations with Brussels and, particularly, with Berlin.
Nothing surprising in this, you might say, but in his view, London could retain its role as a pre-eminent “wholesale” financial centre and lead financial services in Europe as a whole, even if the UK were to leave the EU.
Turning to the global economy, his outlook was positive, although headwinds still impede progress.
Three topics have dominated monetary policymaking over the last five years. First, the emergence of a multi-speed global economy – emerging economies are no longer correlated with mature ones as they were.
Second, the mature economies have suffered the consequences of the credit crunch and recession, either through high unemployment, particularly among the young, or a sharp decline in real wages. Most EU/euro-zone countries have suffered high age-related unemployment. The UK preferred a decline in real wages. Wages in the UK will turn up cyclically, but a reduction in age-related unemployment in still relatively inefficient EU/euro-zone labour markets will require government intervention.
Third, the euro-zone is now set on ultimate banking and fiscal union, a destination the UK would be prudent to avoid.
How might this end? The big question is whether the euro-zone will stay true to form, increasing regulation and cost, with a consequent loss of efficiency.
Lyons sees London’s big opportunity in the future development of the retail side of its financial services industry, winning business from both the EU and rest of the world.
Embedded in this view is a strong note of caution, however. The City would rather we stayed in the EU, but mitigate the propensity of EU parliamentarians to evermore prolix regulation. Many would agree, but the ‘etatiste’ tendency in the EU may yet prove too strong to overcome.
Meanwhile, like many other plenary speakers, Lyons is mildly pessimistic about euro-zone growth prospects.
Bernard Walschots, CIO at the Dutch Rabobank Pension Fund, spoke of the way his pension fund had transformed itself from defined benefit (DB) to group defined contribution (GDC) over the last year.
He brought his interlocutor, Phillip Coggan of The Economist, to the point.
The premium cost of the new GDC is equal to more than 20% of payroll, twice the average going into UK DC schemes. Coggan asked if this was not too expensive, adding that it might seem so to many British employers.
That is the cost you must meet, replied Walschots. Perhaps Dutch courtesy prevented him from adding that most UK DB plans are substantially underfunded. Rabobank, by contrast, is working to meet its pension promise to members.
Walschots’s explanation of how the scheme’s 90,000 active, deferred and retired members had been persuaded to support the transformation offers some valuable lessons for UK trustees.
Dutch schemes are, of course, free to freeze pension increases and may even reduce pension payments with members’ consent.
Rabobank is about to make 10,000 employees redundant as part of a cost-cutting exercise. Walschots is concerned that redundant scheme members may be less loyal – winning their support in continued management of the scheme could be challenging. What emerges is a picture of far closer involvement between trustees, CIO and members than is common in the UK.
As with other Dutch funds, a minimum funding ratio of 105% must be maintained – if it falls below, the scheme has 36 months to recover.
Walschots’s investment strategy is focussed on a combination of ‘smart beta’ and ‘risk parity’. Smart beta looks for enhanced returns from a combination of market anomalies, value plays, quality, momentum and the illiquidity premium in small-cap listed equities.
This requires active management, but results, he says, in enhanced Sharpe and information ratios.
Meanwhile, the implementation of risk parity is effected through asset allocation and a sophisticated overlay programme; linear and non-linear instruments to optimise the reduction of downside risk and amplification of up-side benefit on portfolio volatility.
Andrew Neil likes to frack
There is always a big, single solution to all our energy problems – wind, water, solar. Well-known journalist Andrew Neil, the conference’s closing speaker, is in no doubt that we should stop importing oil and frack instead.
Perhaps, but the really interesting part of his speech was his reminder of the extent to which the US has transferred its strategic attention from Europe and the Middle East to containing the People’s Republic of China while maintaining hegemony in as much of the rest of Asia as still possible.
Europe will have take up the slack left by the American fleet sailing eastward over the horizon, and one big question is whether Brussels can rally to the challenge. On this, he has a memorable pensions joke: “Belgium does not have an army, just a very well armed pension scheme!”
He also argues persuasively that UK interest rates will not rise before the next general election, scheduled for 2015. He does not think the new governor of the Bank of England, Mark Carney, will want to be seen to be taking “political decisions” until the country has a new government in power.