The fall-out from the attacks on New York and elsewhere have opened the debate about asset allocation and whether long term changes need to be made to investment strategies.
Gordon Sharp, director of investment consulting at KPMG Pensions in London, says that there hasn’t been any radical change in the strategies of pension funds in the UK, but the disaster is certainly adding impetus to the already existing trend for trustees to begin focusing on bond weightings, fuelled by a maturing pensions market and the minimum funding requirement. “I haven’t seen any major change of position, but the ball is definitely rolling as pension funds mature and bonds become more attractive.”
Fons Lute, head of investment strategy research at the Dutch airline KLM Pensioenfondsen in Amstelveen, says that short-term solvency rates may be affected but the longer-term investment strategy will remain unchanged. “We are basically sticking to our current position in terms of our strategic asset allocation and preference for equities. And that won’t change.”
Looking at things tactically and shorter term, Lute believes that equity prices have reached valuation levels and are more attractive than a year ago, despite the recent market turbulence.
“It is a great tragedy but this kind of turbulence in the markets is not entirely abnormal and we needn’t get too emotional and start pulling back the money,” he says.
John Gillies, senior consultant at Frank Russell in London, says the tragic events will undoubtedly lead to reviews of asset allocation for many pension funds and asset managers but more from a risk control perspective than protection against unforeseen disasters. “We will see changes but more in terms of risk reappraisal and how we can best tolerate it,” he says.
Gillies nonetheless believes that we may see some reassessments of portfolios. “People may well wish to reconsider the level of equity exposure in their portfolios, and whether they want to have a more diverse mix of equity types or asset classes.”
Asset managers, too, feel that risk aversion and diversification strategies are likely to be adopted to help alleviate the initial fallout from disasters of this scale.
Peter Nethe at Theodoor Gilissen Bankiers in Amsterdam says that diversification doesn’t necessarily mean a radical shake-up in asset class but creates an environment where people take less risk. “Portfolio reassessment won’t see investors dropping equities but rather mixing them up or introducing other asset classes to complement and support them, creating a more even risk spread.”
Deutsche Bank Research in Frankfurt paints a different picture. “In the current scenario of military tension and volatility, we are likely to see a return to the quasi-permanent risk premium not seen since the end of the Cold War,” says a spokesperson there. It is their belief that this will translate into substantial reallocations of assets from equities into money market and government bonds.
JP Morgan Fleming Asset Management is looking at the incident in the broader picture, saying it was already in a defensive mood prior to the World Trade Centre attack, with generally flat portfolios relative to their benchmarks, which could prompt allocation reviews.
Merrill Lynch Investment Management believes that, rather like the reaction to the Gulf War, the eventual market and economic outcome will be influenced more by the political, diplomatic and financial developments than by the attacks themselves.
Fidelity Investments agrees, suggesting that trying to ascertain the economic consequences of the attack is that bit harder as it was essentially political in nature.