Diary of an Investor: Mental resolve
The beach at Scheveningen is broad and blustery at this time of year. The tempestuous, grey North Sea contrasts with the pale, wan light and the broad horizon, and I always find that a brisk walk with our Labrador-cross Dubbeltje brings about the right sort of mood to deliberate on the problems that are taking me the most time to resolve.
I ask myself about the risks we are running: what to do with our equity exposure? Wasserdicht Pension Funds has been running a target 35% exposure to equities, with a quarter of that allocated to emerging markets. That 35% ran down to more like 22% at the nadir of the global crisis in autumn 2008 but we kept our nerve, buying last year, and we are now almost back to where we were.
I recall the fact that our old CFO always used to rail against ‘the cult of equity’. Our new CFO, a Swede, has been more pragmatic, but even he baulks at the risks we may be running.
Like many other members of the trustee board, we have all spent Christmas reading the latest investment tomes. I think back to the January meeting, when everybody was keen to show off the reading they had just done. “We’ve just had the worst equity decade in a lifetime according to MSCI,” says Göran, our CFO, who has an advisory seat on the investment committee. “What about the new normal, Pieter?”
“Pieter,” cries the chairman of trustees, a former Shell executive and native of Maastricht, “I’ve been reading about Benoit Mandelbrot over the break. Shouldn’t we consider fractals and chaos theory? Why invest in equities at all when we can invest in other, less volatile assets, using our liquidity premium as a long-term investor, for instance?”
“Well,” I say, leaning back in my ergonomically designed meeting-room chair, “we first went into equities to diversify our assets away from Dutch government bonds. We have held Royal Dutch-Shell for many years, for example, so we are no short-term player. Then we went largely passive and diversified into emerging markets. We’ve moved slowly and for good reasons, changing our strategic exposure when we have needed to. I don’t advise that we sell now and with a return of 5.9% annualised over 10 years, I think we have done well.”
Light plashes of rain began to hit me. I called back a wet Dubbeltje from the edge of the sea and we turned homewards. The investment committee meeting had ended without any definite decision to take our money out of equities, and I had resolved to do some more work on the matter.
As I approached Scheveningen, I remembered another matter I had failed to attend to. My wife, Jeanette, a risk averse Frenchwoman from the Franche-Comté, had been asking me for weeks to review the family savings. And what about our money in equity funds? At 60% and rising, it was probably far too high.
Pieter Mullen is investment director at Wasserdicht Pension Funds