I recently chaired the Investment Committee of a charity. It is a role that I’ve held since the end of 2008, when it became apparent that using the ‘CAPS Median Charity’ asset allocation for their pension fund hadn’t led to comfortable results through a financial crisis. And to be honest why would it?
The recent quarterly meeting was against the background of broadly a 30% fall in equity markets. Our funding level had fallen less than 5% due to market moves, which whilst uncomfortable wasn’t catastrophic.
This result was the result of diligent processes and clear thinking, it wasn’t luck. We took advice on asset strategy and sponsor covenant very seriously and have a thorough understanding of the liabilities and the strength of the sponsor and importantly their willingness to support the scheme.
At a personal level, my entry into the start-up Investment Practice in the early 1990s was to program the new Asset Liabilities Modelling software for R Watson and Sons’ to provide rigour, analysis and insight into the nascent science of asset allocation. We provided myriad charts, rainbow coloured, and endless pages / tables of numbers to show clients ‘what could happen’ at various probability levels.
Analysis is only useful if you can interpret it and help decision makers understand its relevance to them. I was in my late 20s and sent out to advise some of the largest funds in the UK with reports based on a new science. There weren’t textbooks, and everyone believed that equities would outperform forever ‘if you could hold them long enough’.
I was lucky enough to be mentored by three people at the time (never ever forget how important mentoring is. If you don’t believe you have a good mentor(s) in your life, then sort it out). Patrick Lee (former partner at R Watson & Sons) about systems, programming, modelling and Andrew Wilkie (former partner at R Watson & Sons), about econometric modelling and assumption setting. Roger Urwin (currently Global Head of Investment Content at Willis Towers Watson) about consulting, governance and decision making.
One of the most useful pieces of wisdom I have ever received was from Roger in those early days. I asked him how I should interpret those myriad pieces of analysis for a client and advise them as the ‘right’ asset allocation. It was simple guidance: ‘you should choose an asset allocation which will provide an acceptable outcome whatever the markets do’.
I have followed that advice through all my consulting career, and I applied it in making decisions for the charity Investment Committee that I now chair. It is remarkably simple, very powerful, and leads to strategies that are robust to crises.
This insight doesn’t just apply to asset allocation. Many of the key features of AMX can directly help increase the robustness of an asset portfolio to all conditions. I can easily think of independent directors, independent risk management, third party cost control as providing big ‘ticks’ in crises.
If you’d like to speak about increasing the robustness of your pension fund’s portfolio, please get in touch.
Photo credit: Andrew Drake