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Diary of an Investor: Political perils

Last month I met with my old friend Thijs, who is CIO of a large UK corporate pension scheme, working in a small investment office in the UK with an enlightened CEO. It’s a good set-up, he tells me when we meet for a drink in Amsterdam in January, with no shortage of challenges.

‘And on the work and family front everything is pretty good,’ Thijs says as we sit down. ‘We’ve found a fantastic place to live and the kids have settled into their new school.

‘It just feels strange moving to the UK as a Dutch citizen and then everything changes a few months later because of Brexit’.

There had been little news about Brexit in the Netherlands until recently, when the new British prime minister made a speech about it in London, in which she announced that Britain would not stay in the European single market.

‘At least we know where we are,’ Thijs says. ‘That is, until the negotiations start and the picture changes again.’

‘What does the pension fund think about it?’ I ask.

‘It’s pretty clear that most of the British people in the investment office voted against Brexit and that they still don’t think it is going to be easy or a very good idea. But it’s a different story with some of the trustees. From the questions they ask, it seems we are living on two planets. They tend to see the upsides, like the equity market rally and the depreciation of sterling, which has boosted our non-UK exposure. 

‘It’s true, these things have benefited us of course. But they don’t really like it when we talk about the longer-term downsides of higher inflation, lower growth and uncertainty in the whole political process of Brexit.’

The waiter brings us our main courses and tops up our glasses. ‘At Wasserdicht, the trustees have been asking more questions about political risk,” I tell Thijs.

‘So, like other Dutch funds, we benefited from the Trump equity rally and the rise in rates at the end of 2016. That was very good for our coverage ratio.

‘But now the trustees want to know about the political risk in our portfolios, particularly our holdings in emerging markets. 

‘The truth is that it’s very difficult to say anything meaningful because we don’t know what Trump will do in power. And we don’t know how markets will react. Actually, emerging market equities did well in 2016, and have recovered since Trump was elected.’

‘What do your asset managers have to say?’ Thijs asks.

‘I’ve been in contact with the account manager for our main emerging market mandate and she has sent through some documents and arranged a meeting,’ I reply.

‘I have the strong impression most of their clients are asking similar questions. My overall view is that they are trying hard, but they also don’t know how to deal with political risk in their portfolios and they don’t want to admit it.’

Pieter Mullen is investment director at Wasserdicht Pension Funds

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