Diary of an Investor: Reading the coffee grains
Can you guess the topic of discussion of the latest Wasserdicht global investment committee? You probably can: it was political risk. But our discussions reminded me a little of drinking coffee with my grandmother when I was a boy. She loved to read the grains at the bottom of the cup to see what they might say about the future.
We did not anticipate Trump and Brexit but, luckily, the market fallout was limited for us. And we have benefited from buoyant equities since the Trump election. What about the other political risks?
We started off by talking about what we know. It fell to me to talk about the Dutch parliamentary election. As I had predicted, the leading party did less badly than expected and the populists indeed failed to break through.
Clive in London wanted to know what it would mean for the Dutch pension system. ‘Reforms have been on ice for a long time and Dutch governments take a long time to form, so we will have to wait a little longer,’ I said.
‘There is a risk that this could be a messy compromise. But the leading party and the liberals both support greater individual choice. It will probably depend whether the Christian Democrats support a collective approach or not.’
Attention passed to the US. ‘Trump wants to reform the Dodd-Frank financial legislation package,’ said Jim. ‘But it’s not clear what he wants to achieve. Many firms have already adapted to new regulations, like the fiduciary rule for investment advisers, and they don’t want to row back. In any case, don’t bet on a wholesale bonfire of financial regulation stateside!’
Should we hedge against an upset in the upcoming French election? Wasserdicht has no French subsidiary, so we had no-one to give a local perspective. Hans in Frankfurt was keen to take risk off in French government debt and to move to Bunds. But Clive in London, along with the most of the rest of us, think a French presidential upset is unlikely and are against defensive portfolio positioning.
Brexit leads to an interesting question for our continental European portfolios: should we continue with pan-European equity mandates or concentrate on euro-zone equities and treat UK and peripheral equities differently.
Currently our global pension funds pool their European equity allocations with a single passive manager and two active managers. ‘There is certainly a case for moving to a euroland equity benchmark for the passive manager and including the UK in our respective global mandates,’ says Hans.
‘From a US perspective we see the UK as economically part of Europe, whether or not it leaves the EU,’ says Jim. ‘We have dollars in those mandates and it wouldn’t make sense to us to take the UK out.’ Clive cautions: ‘Better wait till we know what Brexit will actually mean.’
Another hour of political risk discussion brings us no further. At that point Anja, my assistant comes into the room. ‘Coffee anyone?’
Pieter Mullen is investment director at Wasserdicht Pension Funds