As part of our coverage of the aftermath of the tragedy in the US on September 11, we invited pension funds to air their feelings and views in a special Off the Record considering the impact of the terrible events on our industry going forward.
Your responses were both pertinent and resonant, befitting a terrible event that may come to dominate both the political and financial scene for years to come.
The impact of the terrorist attacks and the subsequent global market fallouts were by no means uniform across the pensions community, however.
Just under half of respondents said they had experienced a notable impact on the fund.
One manager confessed that the scheme had lost a “tremendous” amount of money, although on the whole damage to portfolios appears to have been relatively slight with a number of replies noting that their NAVs mirrored the losses on the markets.
A fund comments: “The value of the portfolios is down in line with the falls in the main markets, except for local property.”
Whether the fund itself was hit or not, over half of you were affected indirectly by the sometimes tragic difficulties visited on asset managers.
Firms mentioned by respondents include Fiduciary Trust, Morgan Stanley, Merrill Lynch and Bank of New York, many of which had to switch to emergency backup sites.
A couple of responses noted some delays with custody operations, but barring that the Herculean efforts of investment banks to maintain “business as usual” appear to have been impressively successful.
In terms of subsequent action for pension funds though, the overwhelming impression is that it is too early to say what might happen.
Only 18% of schemes said they had already made portfolio changes, with a number amongst those noting that they had overweighted Europe against the US or sought to reduce the level of risk in their equity exposure.
At the time of writing, the majority of pension funds conceded that they were waiting for the reaction of the US to the attacks before taking any action.
One response indicated that business goes on despite tragedy: “If buying opportunities are presented then we will act.”
A similar contingency strategy was hinted at when we asked you about ongoing strategic reviews. Less than a third of funds said they had reviewed their strategies thus far, although one pointed out that they had carried out a review just days after the US attacks and were reviewing this on a ‘rolling basis’.
The vast majority predicted such reviews could not be far off – mostly within a matter of weeks, albeit dependent on possible US retaliation.
“This will be considered as events unfold, such as US military action,” commented one fund.
Another scheme manager was more circumspect: “We will only take a strategic review if there are significant impacts on the world’s financial markets.”
Nonetheless, two thirds of managers believe that the events will warrant a change in asset allocation at some point.
“Asset allocation will change, but it is too early now,” said one scheme head, adding: “The portfolio could become more defensive.”
Predictions amount to short-term shifts into cash and bonds and increased investment in sectors such as energy at the expense of insurance and tourism.
So how serious do you think the consequences of events in the US will be?
Forty-five per cent of you believe that the aftershock of the atrocities in the US will have a medium-term impact on markets and pension funds, as one manager summises: “The current uncertainty will affect the stock market negatively for the short-term, while the war threat might indeed stay for a while longer, but in the long-term the global economy will not suffer from it.”
A less optimistic 27% forecast a long-term fallout.
One scheme manager opines: “These events will change the world order and for that reason they will have a fundamental effect on the world economy.”
Not one fund manager gave the view that this would be a short-term blip in history – perhaps reflecting the rhetoric emanating from the US about possible repercussions.
Reassuringly, however, the crisis does not appear to have induced panic into the pensions community. Only around a fifth of respondents say they will definitely become more risk-averse as a result, while a third claim to be undecided at present.
The question of hedge fund activity in such unpredicatble market conditions has been a topic of conversation in the investment world, and we asked you whether events had changed your views towards alternatives.
Just a solitary fund says it will “keep a closer eye” on the asset class, although a large number of respondents point out they don’t use hedge funds at present, with one manager fulminating: “I never believed in them.”
While it may be too early to digest the full impact of events that are still unfolding, the question of what lessons can be learned from the attacks in the US is one that merits consideration.
One manager points out that such events are part of the fabric of history and the important thing is not to forget that: “History is made up of those ruptures of historic data!”
Another adds a maxim that we’d all love to adhere to: “Never be sure, think the unthinkable.”
For many of you the real lesson though is one of “security”, which you acknowledge will be come much more important going forward.
“Large numbers of key staff should not be located in one building,” advises one fund head, making explicit a truism that has become so frighteningly real post World Trade Centre.
On the investment front, we asked whether you felt that the economic outlook was now changed after September 11.
Half of you expressed the view that it was, pointing to more “uncertainties” ahead, although one comment addressed the historical perspective and suggested that empirical evidence showed the long-term effects of such events to be “modest”
A suggestion was made that Europe may be the harbour in the US storm: “After a deep fall, European stock markets will have a better outlook long-term.”
“Perhaps people will prefer liquidity instead of stocks in the future,” ran another investment prediction.
Many of you also cited weakening consumer confidence as a potential catalyst for recession
To end, we canvassed you for your concerns going forward. Not surprisingly, the majority of funds expressed fears of conflict ahead.
“I fear that events will repeat themselves and that the US will not think before taking any action,” voiced one scheme.
A number of poignant responses were best summed up, however, in three words that reflected the human tragedy seen in the US: “Loss of life.”