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Regulatory rule change could trigger illiquid investment rush


Defined contribution pension schemes are preparing to increase their allocations to illiquid investments ahead of a highly-anticipated regulatory announcement due in the second quarter of 2019.

The Financial Conduct Authority is planning to relax rules that currently restrict the amount of returns that pension schemes can generate from illiquid assets. It follows a separate Department for Work and Pensions’ consultation on illiquid assets and the development of scale in DC schemes.

The DWP report noted that “by investing almost wholly in highly liquid investments such as publicly-listed equity and debt, beneficiaries can miss out on the illiquidity premium which results from being invested for the long-term.”

Given this recognition that illiquids are indeed suitable for DC pension schemes, fund groups are anticipating inflows into real estate, private debt, infrastructure and venture capital strategies, as pension trustees respond to the changing regulatory guidance.

“Illiquid assets are definitely something that trustees are looking at,” Jayna Bhullar, an investment consultant at Quantum Advisory, told Research in Finance.

“Pension schemes are in a really good place because they have a long-term time horizon, which means they can ride out difficult markets.”

According to Research in Finance’s 2018 UK Institutional Market Study, 45% of consultants predict that pension funds will increase their allocations to infrastructure assets in 2019, while 43% said pension funds would increase allocations to direct lending. One in five were expected an increase in allocations to property.

Quantum’s Bhullar agrees that these illiquid asset classes look appealing, particularly for defined contribution pension schemes, but stresses that smaller schemes are likely to require some assistance prior to making their initial allocations.

“It is about trustee knowledge and understanding,” she explains. “It is important that members understand the investments.

“Some strategies are able to put up gates in the event of extreme liquidity events, so there may be instances where they are unable to access their capital as quickly.”

Bhullar’s concerns were echoed in a recent Pensions Policy Institute paper which stressed that an “information gap” exists for schemes that remain unaware of the benefits of investing in illiquid strategies.

For asset managers, there could also be another hurdle. Smaller DC schemes often use platforms that refuse to accept funds that don’t offer daily dealing as their systems are designed to update with daily pricing. To navigate these challenges, trustees may opt to employ a fiduciary manager.

Despite these considerations, Bhullar explains that there are a wide variety of fund providers in the market for those keen to get exposure.

Macquarie, IFM and Partners Group were among those to poll well in the Research in Finance’s 2018 UK Institutional Market Study when it came to infrastructure debt strategies, while Partners Group, BlackRock and Blackstone were commonly recognised for their private equity strategies.

“We predominantly use Partners Group, but there are several other good managers. BlackRock are quite prevalent in this market.”

* Those seeking to learn more about institutional investment attitudes towards illiquid asset allocations, with views from pension schemes, trustees and consultants, can find out more in the 86-page study, available here.

Calls to Action


A couple of weekends ago, a busy road junction close to my flat was blockaded by a mix of climate change activists, concerned residents and, well, those who simply enjoy a good spectacle and street party of a Saturday afternoon. I live in an area of London where car ownership is low, but air pollution is high; locals understandably feel a sense of injustice when their children are suffering the fumes of through-traffic.

The blockade was organised by Extinction Rebellion (XR), an organisation advocating “disruptive civil disobedience” to hasten political and business action on climate change. The potency of XR and affiliated groups became apparent to me last Friday, when Youth Strike 4 Climate demonstrations took place in cities across the UK. While fossil fuels are a big focus for youth activists, their remit is sustainability more broadly – for example, one of Friday’s blockades (at Oxford Circus, London) was to protest ‘fast fashion’.

While UK youth climate strikers grow in number and become a presence that is harder to ignore, a veteran in the field graces our TV screens for another hard-sitting series on man’s environmental impact. David Attenborough’s Our Planet on Netflix is fascinating and devastating in equal measure. His message is unrelenting: look at the damage we have done to environs and the species relying on them in the last 20 years alone, and think about the serious changes we need to make to save our planet in the next 20 years. Indeed, if the mass walrus death plunge in Episode 2 doesn’t traumatise your children, then nothing will.

Irrespective of your thoughts on the means of message delivery – taking it to the streets or solemn sofa-side sage – it’s hard to ignore the growing salience of the anti-climate change movement in this country.

Yet even against this backdrop, many private investors we have interviewed of late are not tweaking their investment portfolios accordingly. There is still a disconnect between general consumption and investment behaviour, with people happy to pay more for Fair Trade or sustainably-farmed groceries and yet shying away from responsible investing. Paradoxically, they are shying away from funds that will do increasingly well, based on the changing patterns of consumption they speak of.

These private investors, commonly aged 50 and above and with considerable personal wealth, feel like they have a lot to lose if they get their investment decisions wrong. They may have spouses and dependents to think about, or they are looking to fund a relatively long and comfortable retirement. And they believe that there is a trade-off between performance and investing responsibly. Research in Finance has found that 28% of those with more than £250k to invest think that responsible investing is more likely to hinder than improve performance, compared to 11% who hold the opposing view. Of all the private investors surveyed, 37% think it could go either way, 15% anticipate no overall impact on performance and 13% just don’t know what to expect.

So here is our call to action to the investment community: get the message out! If you truly believe that investing responsibly is the way for investors to protect and enhance their savings, start making more noise. Because even though within the industry, we sense ‘ESG fatigue’, this is still all new and baffling to ordinary people planning for their financial futures.

Our Responsible Investment Review report will be published next week. It has been a labour of love following all the exciting developments in this space over the last six months, navigating the nuances in investors’ understanding of and feelings around ESG, and learning lots from responsible investment experts.

Please get in touch if you would like to know more about the Responsible Investment Review. For those who have already subscribed, it will be winging its way to you shortly!

Annalise Toberman, Lead Author of the Responsible Investment Review and Head of Insight, Research in Finance

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