In the last of Newton Investment Management's DC columns for the year, Catherine Doyle casts an eye over the past few months and looks to 2019.
The 2018 budget was on the light side in terms of pensions news, but it was encouraging to note the commitment by chancellor Philip Hammond to promote investment in alternative assets as a means of providing further diversification in defined contribution (DC) portfolios. With Christmas fast approaching (and the Brexit pantomime at stage left), it is perhaps tempting to think of this year as largely a fait accompli and to wish to move on to pastures new in 2019.
The tempo of the financial markets has changed in recent months, making us all acutely aware of the risks inherent in the backdrop, as evidenced by rising volatility. DC members may be largely unaware of these developments, although market turbulence has occasionally grabbed the headlines over the last few weeks as regulatory storm clouds have gathered over the former darlings of the stock market (and who hasn't heard of Facebook, Apple, Amazon, Netflix and Google!). Traditional benchmark allocations to these stocks are substantial as their market capitalisation has soared, together with their valuations, and the sell-off has hit them proportionately harder than other parts of the market. Similarly, oil and gas firms have been penalised by a rapidly falling oil price, again a significant weighting in benchmarks such as the FTSE 100.
While the level of interest in diversified growth funds has waned as markets have continued their inexorable rise, fuelled by unorthodox monetary policy, DC schemes should not forget the original rationale for embedding these strategies in their defaults. The recent market declines are a sharp reminder. By diversifying both return streams and risk, there is a higher probability that such strategies will help to preserve capital as periods of more acute volatility develop. It is also important to appreciate that the economic cycle may end with a whimper rather than a bang (and history shows that the market generals that propelled indices to ever-loftier heights are the first to fall). Having a portion of a scheme's portfolio in a liquid, flexible strategy should allow opportunities to be exploited, while allowing a focus on minimising capital losses.
Without wishing to sound unseasonably gloomy, there are myriad structural headwinds facing the economic backdrop, which we refer to as the four Ds: excessive debt, the disruptive effect of technology, demographics and an ageing population, and distortion from financial policy. These themes are important considerations for DC schemes in terms of the impact they could have on long-term returns. Particularly as members approach retirement, any erosion in the value of their pot is likely to hit them proportionately more acutely. This is all food for thought as the year draws to a close. The Newton team look forward to your readership in 2019 when our column series continues. Season's greetings to you all!
Catherine Doyle is head of defined contribution, UK, at Newton Investment Management. Email: [email protected]
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