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Nervous
times Only its perpetrators could have predicted the terrorist attack on the World Trade Centre of September 11. Economic analysts had already confirmed the reality of a global slowdown, with many countries, such as Germany and the US, heading for recession. On the day of the attacks the stock markets went into freefall and the Dow Jones ceased trading, as the extent of the damage was assessed and rescue operations began. Figures by Schroders for pre- and post-attack economic growth in the G7 countries show the impact on already weakened economies; as a whole, the projected growth of G7 countries was 1.3 per cent in 2001, rising to 2.1 per cent in 2002. These figures were revised on September 25 to 0.9 per cent in 2001 and 1.1 per cent in 2002, with Japan plunging into recession with projected growth of -0.5 per cent for the next two years. Investor reaction has varied, but many strategists concur that any change to client portfolios as a result of a knee-jerk reaction to events of September 11 is unwise. Cautious optimism may best describe the investment strategy positions of fund managers following the attacks, but is this a result of a financial crisis contingency plan, or were they reacting to events as they unfolded, along with the rest of the world? Robin Woodall, head of UK equities at F&C Management Ltd, is not convinced of the viability of such a plan: “If you think of other financial crises that have happened, such as the 1992 ERM exit in the UK, or maybe the failure of Long Term Capital Management, which were very much financial and economic issues as opposed to a political and military issue, each one of those was, by definition, a one-off event. So I don’t think there’s any investment lesson you can take away from the last crisis in terms of how you should deal with the next one,” he says. F&C has not made any major changes to its investment strategy or overall asset allocation (at the time of writing) because, says Woodall, during times of significant moves in the markets, “often the very best thing is to do nothing.” He concedes that while investment in certain sectors such as leisure, travel and insurance has taken a sharp downturn and affected the likelihood of a near-term economic rebound, interest rate cuts and government fiscal intervention should ensure the economy is back on its feet by the middle or end of next year. Confidence in the financial markets is hard to quantify, and while the events of September 11 have clearly exacerbated the situation, a survey conducted by the CBI and PricewaterhouseCoopers before the attacks showed business confidence among financial services companies to be at its lowest point since December 1998. Employment in the financial services industry fell for the first time in five years, a trend which is expected to continue over the next three months, with securities traders, banks and fund managers suffering the biggest cuts. In such a negative atmosphere, it seems that a certain amount of belt-tightening and safe investing is in order, but some fund managers are, by their very nature, more cautious than others. “As a bottom-up stock picker, we don’t have the asset allocation that a top-down manager would have, and we don’t take extreme asset allocation positions,” says Anne Read, associate director, corporate communications at Fidelity Investments. She adds: “In times of volatility I think it can be seen that taking extreme views in asset allocation can expose a portfolio to undue risk.” Equities, which are traditionally viewed as a risky option, are nonetheless finding favour with some, even in times of financial uncertainty. “We believe they remain the asset of choice,” says Tim Rees, director of investment strategy at Clerical Medical. “There are issues of valuation, of timing on the economy, of technical support and of liquidity – and they all have to be considered. But in the absence of a marked deterioration in the economic outlook and the onset of a broadly deflationary environment, we don’t think that bonds offer particular value, so we will continue to be positively inclined towards the equity market,” he says. HBOS plc (the new company formed after Halifax and Bank of Scotland’s merger), of which Clerical Medical is part, issued a temporary blanket ban on short-selling. Rees defends the move, saying: “We felt that it was more harmful to our investors, in terms of forcing share prices lower, than it was beneficial to us in terms of the fee income that we achieved from it.” The FSA temporarily amended its ‘resilience test’ in reaction to the attacks, with the aim of encouraging liquidity in the markets. Under normal circumstances, insurers would be obliged by their actuaries to move into fixed-interest securities as a result of the fall in the value of equities. With the new temporary regulations in place, actuaries are being granted greater freedom in making assumptions. “The overall effect will be to ensure that insurance companies continue to manage their businesses on the basis of prudent assumptions, while at the same time averting the need for them to engage in unnecessary technical selling to their detriment and that of their policyholders,” says William Hewitson, head of the actuary’s department at the FSA. As far as pension funds are concerned, should investment strategies be any different? Although the immediate value of pension funds will have dropped along with the markets (Robin Woodall estimates that an additional 5-10 per cent will have been wiped off as a direct result of September 11), they are, by their very nature, long-term investments. The common ‘lifestyle’ option for many funds is designed to protect those nearing retirement age from this very kind of financial crisis, with assets moved from high-risk equities to lower-risk bonds or cash. Even so, pension fund managers are not immune to financial crises. Tom McIntosh, chief executive of Swiss Life Asset Management, explains how he advised his fund managers to react following the recent terrorist attacks and what measures can be reasonably taken in periods of uncertainty. Citing the 1998 Asian financial crisis and the Gulf War in 1991 as examples of crises you could see building up, he says: “I think you can take some considered action in advance by analysing the sectors of the market that are likely to be relatively resilient in the worst case scenario,” he says. “When you get that luxury, pension fund managers tend to move their portfolios into a more conservative stance; they’ll probably tend to reduce overseas exposure, increase domestic exposure and generally have less exposure to equities.” But in events such as last September’s when you have no forewarning, the key words are ‘don’t panic’, explains McIntosh. “Almost inevitably, if you try to react on that same day, you’re going to make bad decisions,” he says. Swiss Life advised its fund managers to invest in non-cyclical consumer stocks such as utilities and pharmaceuticals, and also, perhaps surprisingly, in technology stocks, which McIntosh justifies as having “a longer-term bear market, which is more to do with business investment expenditure than consumer confidence.” The company is maintaining its fairly high bond exposure, and may well increase cash sources as equity weightings increase over the coming months. McIntosh says pension fund managers have a bit more time for decisions during a financial crisis, as clients tend not to withdraw their money from the fund, looking instead to increase its value over a period of decades. Those who are approaching retirement may have to make informed decisions about whether to continue working beyond their anticipated retirement date, depending on market forecasts. While no one in the finance industry can predict crises such as those of September 11, it is possible to “stress test” investment strategies against various scenarios, and react to any unforeseen crisis from a considered standpoint. Tim Rees concludes: “The whole point of investment is that it should be made at a point of relative certainty – you should know why you’re doing it. Far better to sit on your hands and look further out, rather than worrying too much about the short term.” Reassuring words in turbulent times. - Pensions Age November 2001 - BACK
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