Pension funds should deal with the COVID-19 crisis by preparing for everything and refraining from making any predictions, according to Jaap van Dam, director for investment strategy at PGGM, the second largest Dutch asset manager.
During an online seminar about pension funds and investments – organised by Dutch pensions publication Pensioen Pro last week – he said that thinking in scenarios is now very useful for establishing new policies.
“It helps pondering about possible worlds and prevents focusing on a single world view,” he said.
Van Dam, as well as Hanneke Veringa, country manager for AXA Investment Managers, and Hedwig Peters, professional pension fund trustee, said they expected significant volatility to last for months or even years.
They recommended pension funds to assess the impact of COVID-19 on several sectors, to make scenario analyses and to stick to their environmental, social and governance (ESG) polices.
“It could go in any direction,” said Peters. “Do people run to Ikea and the outdoor cafés when the economy reopens, or do they prefer to stay in their back garden? And how many people will lose their jobs? I’m also afraid of new corona[virus] peaks.”
“Nobody knows what will happen,” said Veringa, who expected two years of uncertainty, depending on the availability of a cure against the virus.
Van Dam noted that inflation could get a foothold as a result of governments’ demand on capital markets.
“This would require another investment approach. Pension funds should look into this scenario as well,” he said.
However, he warned against “adopting current wisdom” in assessing coronavirus effects, “as views could have radically changed in six months time”.
According to Veringa, uncertainty has triggered a tendency to avoid risk among pension funds, but she noted that they have kept focus on the long term.
Peters recommended pension funds increase their investments in venture capital, to encourage innovative startups, for example in biotech or internet technology.
She also suggested the re-introduction of thematic investment funds. She believes the stability of an equity portfolio could be increased by assessing which sectors are seriously affected by the pandemic and which emerge in a better shape.
“Health and online firms are expected to weather the pandemic well, but this is very much the question for the hospitality and retail sectors.”
Van Dam said it was “fascinating and encouraging” that companies with a clear social contribution are doing well.
“A long-term strategy, solid balance sheets as well as impact targets for, for example, food and health, help to create value.”
Veringa added that socially involved management, combined with a decent ESG policy, warranted good operational management.
“It turned out that portfolios with these kind of companies have held up better than expected in the past three months.”