“When I look at governments and the amount of spend right now, I see them sort of investing to survive as opposed to the investment that they put in in 2008 and beyond for growth.”
Ruston Smith is the Chair of the Tesco Pension Fund (DB and DC) and Tesco Pension Investment Ltd, Non-Exec Chair of JP Morgan Asset Management (EMEA), Non-Exec Chair of Smart Pension Ltd, Non-Exec Chair of PTL Ltd, Independent Trustee and Chair of the Funding and Investment Committee for the BAE Pension Fund, Governor of the PPI and Chair of GroceryAid (charity for the grocery industry).
Due to the pandemic, pension funds in the UK and Europe were hurt, but are set to return much of their strength as we return to normal. The relative strength of pension plans is due in part to strategic de-risking that started back in 2006. This has involved a significant reduction in equity holdings and an increase in bonds. “The Pensions Regulator is really keen that UK pension funds have a very clear journey plan, which basically is a plan to de-risk so you get to a point of funding where essentially you can have just a low dependency on the employer that supports that pension fund.”
As we approach the end of the pandemic and the vaccine rollouts are near completion, there will be opportunity for a more sustainable recovery. This necessitate investments in areas like infrastructure and job training, important to jumpstart the economy.
LISTEN AND SUBSCRIBE
SPEAKER
Ruston Smith
Non-Executive Chairman
Tesco Pension Trustees Limited
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. I'm Rachel Pether and I'm a senior advisor to SkyBridge based here in Abu Dhabi.
Rachel Pether: (00:17)
Now, SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT Conference series, we aim to empower really big important ideas and provide our audience a window into the mind of subject matter experts.
Rachel Pether: (00:36)
The focus of today's talk will be on pension funds and their approach to ESG investor. And who better to discuss this with than Ruston Smith, the chairman of the Tesco Pension Fund and Tesco Pension Investment, the largest corporate pensioner scheme in the UK with over 350,000 members. Now, Ruston wears a number of hats: he's the non-exec chair of JP Morgan Asset Management, EMEA, a non-exec chair of Smart Pension in PTL, an independent trustee and chair of the Funding and Investment Committee; the BAE Pension Fund, governor of the PPI, and chair of GroceryAid, and he's also a former chair of the Pensions and Lifetime Saving Association.
Rachel Pether: (01:20)
I've had the pleasure of knowing Ruston for a few years now and he's an incredibly humble person, but I do want to embarrass him and point out that he recently won Pension Personality of the Year. And it was noted that he is a pension superstar and one of the nicest people in the industry.
Rachel Pether: (01:37)
As always, if you have any questions for Ruston, please just enter them in the Q&A box on your Zoom screen.
Rachel Pether: (01:44)
Ruston, you pension superstar, welcome to SALT Talks.
Ruston Smith: (01:48)
Thanks very much Rachel. By the way, I hear you had a trauma this morning. How's your finger?
Rachel Pether: (01:55)
I did. I cut myself. My nickname when I was growing up was Calamity Rachel. So, no surprises there.
Rachel Pether: (02:03)
But before we begin, obviously we want to do a deep dive today into pensions and ESG investing, but maybe you can tell me a bit about your personal background?
Ruston Smith: (02:14)
Well I am that old, I've been in pension investment now for about 35 years. So, time flies when you're having fun. I've spent 15 of those years as the group pension's director at Tesco. And alongside that, I was also CO of Tesco Pension Investment, which is the in-house STA approved investment firm that we set up in 2012. And I also had some people responsibilities, and I was head of insurer risk as well. And I had a few other jobs along the way, I happened to be a CoSec of a FTSE firm, a FTSE 250. Although I'm not a lawyer, I was also head of legal as well. As you said, I was chair of the Pension and Lifetime Savers Association, and I co-chaired the governments 2017 review of automatic enrollment and led a few other initiatives as well. So it's been great fun, Rachel.
Rachel Pether: (03:08)
Excellent. No, you've obviously got a number of years experience, and I'm not saying that because you look old or anything like that at all. But we've had people on SALT Talks before and talking about some of the funding gaps in the US pension market. So, given your perspective and your expertise in the UK and European pension market, can you talk us through the status of funds there? Does it show a similar level of underfunding that the US does?
Ruston Smith: (03:37)
Yeah. So what I'd say Rachel, is that certainly in the last few years, the funding gaps across Europe have narrowed. We've had some good investment returns in fact over the last five years. As you know the FTSE world has returned around about 12% a year. Interest rates have reduced so that means that gilt yields have gone down, which naturally increases the cost of pensions. But generally, funding positions have improved.
Ruston Smith: (04:06)
However, at the beginning of 2020 of course, with COVID, it was quite a challenging time. So what we did find is that assets fold back a little bit and those funding gaps opened a little bit wider. But to be honest, having spoken to a number of consultants across the UK just over the last week, I think the view is that actually they will come back. So, we're probably now back in the position that we were last year, so that's a great position to be in.
Ruston Smith: (04:35)
Of course, you'll hear accounting deficit information from CFO's when they announce their results. A kind of similar story Rachel, they sort of had a difficult first couple of months this year because simply yields fell down. Implied inflation went up and assets fell at the same time, so those international accounting standards gaps increased. But again, they've come up. Credit spreads have widened a little bit now and they're really pretty much back to where they were before. However, as always, there's a caveat: it depends on the investment strategy, the extent of hedging and all that kind of stuff. So those funds that are a better hedged, very good diversification across their assets, will be in a better position than perhaps those that are less well funded and not so well hedged as well.
Ruston Smith: (05:29)
But probably one point to call out, just particularly in the UK market, is that we have been on a program of de-risking. So, that basically means that we've been moving from return-seeking assets like equities into what we call matching assets. They're assets typically like government bonds, so where the yields are sort of matching the discount rates of the underlying pension liabilities.
Ruston Smith: (05:55)
And just going back to 2006, there's been a surprising change since then in the allocation to equities when, at that time, we were around about on average 61%, and the allocation has now reduced down to 24%. And a similar reverse story for bonds. So at that time in 2006, it was around about a 28% average holding, that's now increased up to 63%.
Ruston Smith: (06:22)
So you can see that there's been quite a significant amount of de-risking across the UK. And the Pensions Regulator is really keen that UK pension funds have a very clear journey plan, which basically is a plan to de-risk so you get to a point of funding where essentially you can have just a low dependency on the employer that supports that pension fund.
Rachel Pether: (06:48)
Yeah, I'd love to go into a bit more detail about that de-risking side of things shortly. But you mentioned the 63% allocation to bonds, and I also want to go more into the areas of lower growth and lower interest rates. But just taking a step back and looking at some of the macro recovery plans that we're seeing post-COVID, what are some of the implications here?
Ruston Smith: (07:16)
So I think, first of all, just to call out the obvious, where we haven't really got the pandemic under control, we're still waiting for a vaccine. And I'm sure that when that happens we'll see sustainable rises in the market. It's really a very different challenge, I think, to the one in 2008, the financial crisis. And when I look at governments and the amount of spend right now, I see them sort of investing to survive as opposed to the investment that they put in in 2008 and beyond for growth.
Ruston Smith: (07:50)
The IMF estimated, more recently, that countries across the globe are probably invested for COVID something like $11.7 trillion. Put into context, that's around about 12% of global GDP. If we go back to the financial crisis, the G20 countries, their stimulus package was equivalent to more like 2%. So you can see already the level of spending that we've had.
Ruston Smith: (08:20)
I mean, in terms of the recovery plan and where we might go when we start to see some light at the end of the tunnel, again, comparing it back to the last financial crisis, I think from my perspective and listening to people like John Allan in the UK who's leading the sort of COVID recovery plan, getting business leaders together across the UK, I think we're looking for a much more sustainable recovery and also looking at opportunities to almost leapfrog where we are to where we need to be. So investment, for example, in the likes of infrastructure, training in particular ... because I think people will need new skills in the new world ... digital and also technology.
Ruston Smith: (09:01)
But of course there's still huge uncertainty. And if we look at the sort of macroeconomic data at the moment, China's just come out and said that they've had growth of 4.9%. Now, that's compared to the same time last year and that's been driven by industrial growth. On the other hand, you look at the UK and we are struggling. We've got growth month on month and quarter on quarter, but it's still behind where we expected it to be.
Ruston Smith: (09:31)
And I think that when we look at 2020, we look back, the IMF is expecting that the globe in total will probably have net negative growth and something similar to the great depression, the 1930s. So this is really quite a significant event. And probably we'll find that China's the only major economy that will have any year on year growth when we get to the end of this year. So, a few challenges ahead.
Rachel Pether: (09:59)
No, thanks Ruston. And also want to pick up a bit more broadly on some of the income generation points that you mentioned. We have had an audience question come in from Ken [Lustock 00:10:10], which relates directly to what you were just talking about. And he said, "So in this environment of potentially lower interest rates of the longer-term and the significant de-risking that you speak about, it'd be great to hear your perspective on how pension funds anticipate generating sufficient returns and being able to keep funding the pension obligations."
Ruston Smith: (10:30)
So, that's a really valid point. Looking across Europe at the moment, there are some nominal rates, some nominal yields which are actually negative. But then when you throw into the mix inflation, you can actually see that yields, real yields, are negative pretty much everywhere. So, for example, in the UK, if you look at 15 year index-linked yields, their yield at the moment is -2.8%.
Ruston Smith: (10:59)
So, when you stand back as a rational investor, the question is: why would you invest there? The reason that pensions funds do, of course, is because the value of their liabilities, the cost of the pensions that they pay, are pegged to a discount rate that's linked to gilts, gilt yields. And therefore, it does make a lot of sense for pension funds to be investing in gilts, because what happens is as the cost of your pensions go up so does the value of your assets if you're purely matched.
Ruston Smith: (11:30)
However, coming back to the value argument. Obviously there's a cost, because if your returns aren't high somebody has to pick up the cost of funding the scheme, which is typically the employer. So some of the larger pension funds in particular, have been looking at what we call income generating assets. So it's kind of in the private market, the alt bucket, and typically they have long-term contractual cash flows, total returns up to around about 6%. And what they are is a kind of proxy faux yields, clearly they are not gilts, they carry more risk in a number of different ways. But they allow pension funds to invest in a different kind of asset class to try and have a proxy towards matching those liabilities and in doing that.
Ruston Smith: (12:18)
So I think I see more of those private markets investment from pension funds, but particularly at the larger end. If you're at the smaller end, you're probably going to buyout at some point. And typically they like a bunch of gilts, so it's quite likely that lots of pension schemes will continue to buy the gilts that they need.
Rachel Pether: (12:38)
So when you're talking about an income in the private market, would some examples of that be infrastructure assets? Or what would be some tangible examples there?
Ruston Smith: (12:48)
Yeah, I think that's right Rachel, sort of. Infrastructure, long-leased property, although obviously would have to look at the property market to make sure it's a sustainable kind of investment. But something that is long-ish term, so that's 10 to 20 years, if you can get that. Something that's got a good income yield, so that you can also cash flow match as well as matching your liabilities. And then have something that generates a reasonable return.
Rachel Pether: (13:17)
So with so many different variables to think about [inaudible 00:13:21] Tesco Pension as a global investor, how do you think about some of the key trends in the global markets?
Ruston Smith: (13:31)
So I think just going back to the point earlier Rachel, when we get to more stability, when we've got positive news about a vaccine, I think we'll see greater stability of markets and also hopefully a pick up in those. PE ratios, I think, for the rest of this year, will be lower, inevitably. We've had earnings which have been stressed through lockdown in different countries. But also, I think that where we've had sectors that have been particularly affected, unfortunately, I think that M&A activity will pick up. So I think there's an opportunity there for that M&A activity, which might also have an impact on the number of stocks that we see on the stock markets.
Rachel Pether: (14:17)
Yeah, that's actually a great point and I would love to pick up on that, because I guess it ties into your de-risking piece. With fewer and fewer public equities available, are investors walking into some sort of concentration risk there? Or how are you looking at the public equity markets?
Ruston Smith: (14:37)
So, I think it would be a bit unfortunate if they walked into a concentration risk, I think it's got good diversification. However, I think that inevitably, if we go back to the 1980s and you look today, the number of stocks that are actually quoted on stock markets, particularly in more developed markets, has reduced quite significantly. So I think in the US, for example, US stocks that are quoted have dropped from something like 7,000 down to around about 3,000 to 3,500 at the moment. So, that's quite significant.
Ruston Smith: (15:13)
I guess the other consequence of that actually though, is the concentration risk of larger companies. So, for example, you've got the FAANGs in the States. And sort of six of the largest companies in the States, I believe, represents something like 50% or just less than 50% of the US stock market. And equally, across Europe we've got large stocks called the GRANOLAS, I think they were named by Goldman's at some point. Always reminds me of breakfast, it's quite nice. But they represent something like 25% of the market cap of the European indices as well.
Ruston Smith: (15:50)
So that's a watch out, because interestingly if you've got a relative performance target against a benchmark, whether you hold or you don't hold those stocks has a really big impact on your performance. So it's another kind of concentration risk and an implication, I think, of the changing dynamics in markets.
Rachel Pether: (16:13)
Yeah, I think that that question around how to benchmark when you have such a varied portfolio always comes up as a sort of point of discussion and debate.
Rachel Pether: (16:24)
What does GRANOLA stand for actually? What are the key stocks there? Is it mainly tech-driven as well, similar to the US?
Ruston Smith: (16:31)
Yeah, I thought you might ask me that question. So I think it's ... you've got Glaxo for the G, Roche for the R ... and then I'm going to have to check ... AMSL for the A, and then you've got Nestle, and I can't remember the rest. But that's not a bad shot at GRANOLA. So it's basically the first letter of the names of each of the largest companies on the indices in Europe at a point in time inevitably. As I say, named by Goldman's I think.
Rachel Pether: (17:03)
Sorry, I wasn't ready to give you such an on the spot test there.
Rachel Pether: (17:07)
But I just wanted to ask one more question on the sort of private assets right before we move into ESG. If you're looking at a greater exposure to the private markets, how might this align with domestic government investment policy?
Ruston Smith: (17:26)
So that's a really interesting question, as we start looking forward at how domestic investment by governments is made. I mean, essentially, they need to invest in the underlying economy, they need to create jobs. And as I said before, it's going to be in the likes of infrastructure, training, digital and technology. Now, clearly, there'll be a lot of investment in quoted businesses to leapfrog where we are today. But I guess and a lot will be invested in infrastructure, whether that's digital infrastructure or whether that's the physical infrastructure of different countries. And I think that through that, there will be many opportunities through private markets, to invest in opportunities for the future.
Ruston Smith: (18:12)
And in fact, even in the UK, the UK government have been encouraging defined contribution schemes where people pay in contributions alongside the employer. Because they're relatively immature and we've got people been paying in for decades, there's the perfect opportunity where you don't need the daily price in liquidity that you might do in other areas. So it's a good opportunity to invest in the underlying economy and to support start-ups in other areas and build the country. But of course, like anything, a good diversification's really important. So not just between private markets, but also across public markets as well. So I think there'll always be a need for both.
Rachel Pether: (18:59)
Yeah, that's interesting. On the sovereign wealth fund side as well, we're certainly seeing that in the Middle East, that your point about investing in physical infrastructure in the region but also digital infrastructure through the venture capitals. So certainly seeing that on a global perspective.
Rachel Pether: (19:16)
When you're looking at the infrastructure efforts, what sort of returns are you looking for there?
Ruston Smith: (19:22)
Well, and I think when we think of infrastructure, we think of two different things. One is income-generating assets, another is ... people might call them secure income assets, that's another name for them. So, for there, you might be looking at a total return of 6%. Because, again, you're looking at something that is a proxy to gilts, which at the moment are sort of sub-1%, and in some cases negative even in nominal terms.
Ruston Smith: (19:48)
When you're looking at an alternative's allocation, then you'd be looking at double digit ideally. But also you're carrying a lot more risk, and duration is probably just not as important as income-generating assets because they're there to do a very different job.
Rachel Pether: (20:05)
And when you look at the concentrational or market consolidation, do you think that this will open room for more record growth of innovative start-ups? And thank you for your question, Phillip.
Ruston Smith: (20:20)
I think we'd need to encourage that. I think that we've seen a lot of start-ups in the last few years as the economy really got going. And there are so many amazing, creative people. I think the key thing for me, is making sure that we provide the right capital at the right time to the business that can make that difference. But I think that the appeal today, perhaps, would be for entrepreneurs to go down the private markets route and then perhaps IPO at the end of it. Rather than going into a quoted listed company, which of course has huge governance requirements and reporting requirements on quite a regular basis.
Ruston Smith: (21:01)
And in fact, you've seen some entrepreneurs like Richard Branson for example, who was quoted at one point and has sort of de-listed. And again, it's to take a longer-term view and to manage businesses in a slightly different way, but without all those very short-term reporting requirements.
Rachel Pether: (21:20)
Yeah, their companies are certainly staying private longer. I mean look at SpaceX, raised its Series N funding round recently. And historically it sort of went up to like Series B or C, and now we're getting into the latter half of the alphabet already.
Rachel Pether: (21:35)
I do want to shift slightly into ESG. And obviously pension funds with a long-term view can make some long-term investments. How was the Tesco Pension Fund looking at ESG? And maybe you could talk about balancing that out with the fiduciary duty as well?
Ruston Smith: (21:59)
So, I'll first of all differentiate between the Defined Benefits Pension Scheme at Tesco, which is closed, and where ESG is embedded into the investment process. And that includes right across private markets not just quoted equities, for example. What we've got is a retirement savings plan, which others might call defined contribution or DC. But in Tesco, if I say DC, colleagues there think I'm talking about a distribution center so I have to make sure that I'm very, very clear. So we apply responsible investment to both, but they're applied differently. So they say on defined benefit, it's physically integrated into the investment process right across all asset classes.
Ruston Smith: (22:46)
Interestingly, on the Tesco Retirement Savings Plan, the defined contribution scheme, that's quite young actually Rachel. It's been set up in the back end of 2015, worth around about £2 billion today. And what we're trying to do is look at how we can apply responsible investment right across the asset base, 75% at the moment of which is passive, passively managed as opposed to active management. We have spoken to our members, to ask them what matters most to them around responsible investment. We've also captured the language that they use, because the other point that we're very conscious of is there's a huge amount or jargon in the industry, and actually in communications when we try and talk to members across the UK. And what we want to do is to make sure that we capture the language that they use, and then we can talk to them in the words that they use rather than the jargon that the industry uses.
Ruston Smith: (23:50)
As part of that, understanding what mattered most, we're looking at how we apply responsible investment right across the investment strategy, but at the same time emphasizing the areas that mattered most to them. So we're going through a process at the moment where we're looking at how we can leverage that through all the different asset classes. How we can also align that through our stewardship, so that as we are investing and as we are influencing companies and entities at which we invest, we can make sure that we've got a very focused approach to what we're trying to deliver in the long-term. And as part of that of course, we're also making sure that we've good, clear communication with our people.
Rachel Pether: (24:40)
That's great. There's so many points within that I want to pick up on, particularly when you talk about the heavy allocation that you have to passive strategies, but also some of the private market points I think would be quite interesting to go into.
Rachel Pether: (24:55)
So, how do you think about ESG when you're looking at the passive funds that you govern?
Ruston Smith: (25:02)
So, I think the way we look at it is first of all to apply it right across the portfolio, all the savings we've got. What I'm seeing in the UK at the moment is a huge effort to focus on ESG and do the right thing, but it tends to be led by an allocation into an ESG product. So you might have a 20% allocation to a product but then the other 80% is just essentially the rest.
Ruston Smith: (25:32)
What we're going to try and do is make sure it's applied uniformly right across the whole asset strategy, and that will mean probably a greater mix of active management compared to where we are today. But also just making sure the remainder of the passive is responsibly invested. And then, as I say, because we understand what matters most to our people, we're going to look at, for example, three themes are protecting people's rights, so that was part of it, including things like fair treatment of people, fair pay, human rights. Working towards a better society, so caring for the elderly, health, education, future opportunities for all. And then protecting the planet, reducing plastic waste, renewable energy and renewable waste.
Ruston Smith: (26:14)
So we would look at opportunities to invest, where they emphasize the areas that matter most. And, as I say, then align that with the stewardship strategy that we have so that we're influencing in a very consistent way.
Rachel Pether: (26:27)
And so, just taking that and applying that to the private markets there. If you were investing in, say, health care asset like a senior person's home, or something that fitted within one of those desires from your fiduciaries, would you take an active role in the management of that as well? Would you try and influence the company in certain ways or would it be more of a passive private market investment approach?
Ruston Smith: (26:59)
Well, I suppose it depends on how we've got exposure to that company. Whether it's parts of an overall product through an investment manager, a provider, or whether we've done it directly. If it was direct investment, and assuming that it was a sizeable investment, you would hope to have that direct contact with them and influence them in the way that you could best. If it's through the fiduciary, like a manager, then essentially you would have to monitor the manager and how they're doing that.
Ruston Smith: (27:31)
It's an area that I think is quite challenging. And so, it's an area that we're thinking about and sort of asking lots of questions globally, to look at the leading edge way of managing those relationships.
Rachel Pether: (27:46)
And we've actually had a question coming in from the audience, thanks very much Mark, who said, "What's the most efficient way for a manager to create an ESG commingled fund, given that ..." and I guess we haven't really touched on this point yet in depth but ... "Given that ESG means different things to different allocators? Should the manager plant a flag in the ground and say in effect, 'This is what we believe,' and then let the allocators decide whether or not they want to invest based on that?"
Ruston Smith: (28:16)
So I think inevitably, Rachel, that ESG will be generalized. I think one of the challenges we've got at the moment is that we all understand and know what we've got to do through ESG. I think what we're all still grappling on is a consistency around what does good practice actually look like? And then also, how do you measure that? So for example, one of the things that I'm considering at the moment ... and again, talking to global partners ... is what are the most appropriate metrics to use to measure companies and entities in which you are invested?
Ruston Smith: (28:56)
Now, one of the challenges here is you could go to a company ... in fact, you could have 500 or 600 pension schemes going to the same company, all with different metrics and saying, "We think you should use those. And we think you should measure yourselves against those and disclose them." The challenge obviously, is they're not going to do that. So what I'm quite keen on is looking for some global consistency, and I know there are entities out there trying to drive this through, to look at what are the metrics that matter most? Which then, coming back to your question, provides the greatest future influence of change, delivers the future expected returns as well ... because obviously that's important ... but then builds a product which actually delivers on both. So it's a product then, which essentially drives the returns for the customer but also, at the same time, truly hand on heart is going to deliver the most positive influence in the future.
Rachel Pether: (29:57)
So when you're looking at, say, commingled funds, I guess that ties nicely into: what are asset owners doing collectively about ESG? I know there've been a lot of groups formed and discussions have been started. So you've got the One Planet working group, for example, where six of the worlds largest health and wealth funds came together to invest in assets that could tackle climate change.
Rachel Pether: (30:25)
What are you seeing in terms of collaboration between some of the larger asset owners? And do you think more needs to be done in this regard?
Ruston Smith: (30:34)
First of all, I think more needs to be done, it would be better if we could have a much more collaborative approach. But some of the largest pension funds in the UK have been getting together, for example, to look at climate risk, climate change, and look at what is the best approach that we could all take. And then obviously, we benefit from the scale that we create.
Ruston Smith: (30:56)
And just going back to really a question on being the commingled funds. It's about looking at what is the change we want to see? What are the things that matter most to members, which are then the ultimate customers of pension funds? And creating that proposition that really delivers for the customer.
Ruston Smith: (31:16)
So I think that there are opportunities here, but I think it's about listening, it's about identifying the right forward-looking metrics that will make the most difference in the future. And then building product around collaborating together, so that the sum of our parts optimize the opportunities set in the most efficient way for corporates. So, what are the smallest number of metrics that will make the biggest impact? And we can measure them and we can work and get behind them.
Rachel Pether: (31:49)
And are you seeing any negative unintended consequences of the ESG investing? There's been a lot of corporations being accused of greenwashing. What do you see as some of the downsides associated with this?
Ruston Smith: (32:06)
So I think sadly, inevitably, there will be some greenwashing, there is some greenwashing. I think the point that I'm more reflective of is whether or not, with all good intentions, collectively pension funds rush to be net zero on emissions in carbon. And if they do that really quickly ... As I look at the whole global corporate environment, all the companies around the world, you're inevitably going to have sectors that are able to lead, you'll have companies which perhaps are not in the right place to be able to be part of that leading pack. And I guess the concern I've got is, could we be in a position whereby we put all our money behind the companies that will naturally be the leaders? And then, what's the consequence for those who have all good intentions but are starved of capital and are unable to catch up?
Ruston Smith: (33:03)
In the ESG, my mind is around the S, what happens to people in jobs and communities and environments if we just focus on the leaders globally in this space? I'm hoping that won't happen, but I can just see potentially where pension funds want to be doing the right thing and get down to net zero and do it as fast as possible. I do question: what about the rest? And where will they get their capital from and will they be sustainable entities in the long run?
Rachel Pether: (33:35)
Yeah, I guess that's a really interesting point about the intent of the companies, right? If they have an intent to focus on the E and the S and the G and it doesn't quite come to fruition, then whose responsibility is that debt? But I guess as long as the intent and the [inaudible 00:33:54] [inaudible 00:33:55] [inaudible 00:33:55], where there's a will there a way.
Rachel Pether: (33:58)
We have another few questions that have come in from the audience, some are specific and some are broader. So I'm just going to ask a couple of the specific questions first. When you're looking at some of the concentration risk within the GRANOLA stocks that you talked about before, how are you seeing the pension funds balancing outside of these risks? Are they doing that with more hedging? Or it's more just through diversification of other parts of their portfolios, for example?
Ruston Smith: (34:30)
So I think that in the defined contribution world there's a lot of passive investments, so they just hold everything. So that, in a way, that doesn't really matter. I think when you go to active management, one of the challenges is: how do you avoid it? I think when you look at regional equity allocation, in other words you are trying to perform against the benchmark for a particular country, that then becomes quite challenging. Because if you've got some dominating stocks of six, there's a real consequence as to whether you hold or don't hold those stocks. Equally, to be honest, even on a global basis. But what I see more of now, moving away from a more traditional model, is that equity mandates are more global and therefore you've got wider choice and it dilutes the impact of those larger businesses.
Ruston Smith: (35:21)
Having said that, we know that ... I think it's the top five stocks in the US are worth something like $4 trillion. So even globally, when look at the FTSE world, they're still a very big part of it. But I suppose it's like anything, it's just managing the risk of diversification and just thinking about the very long-term philosophy that hopefully you're trying to adopt.
Rachel Pether: (35:46)
Thanks Ruston. So we have time for a couple more questions.
Rachel Pether: (35:49)
So, when you're looking at the long-term philosophy, what do you think might surprise us in the next, say, two to five years?
Ruston Smith: (35:58)
So I think, first of all, I'm quite optimistic. I'm hoping that what we're seeing in the early part of this year, so I think of the canals in Venice and how clean they were when they weren't used, we can see the air and the pollution that's been eradicated in different parts of the world because we took cars off the road. I'm hoping that as we invest in this new world, as we come out the other side of COVID, we will do so in a very sustainable way. In a way that we will invest in technology, we will invest in the planet, cleaner technology, and will accelerate that.
Ruston Smith: (36:39)
So I'm actually hopeful that all those things will be positive. I guess that the bit that concerns me in the short-term are the social aspects around the world. Inevitably, even in the UK, you can see unemployment increasing and the social implications of that, with people not having enough money. And then it's, how do we create an accelerated approach to injecting capital to places to help people retrain very quickly and then importantly get them into jobs?
Ruston Smith: (37:12)
The other thing is that I'm quite hopeful that people have continued to save through the crisis, and particularly people that put money into their pensions at the early parts of this year. When we get back to where we think we're going to be, hopefully they'll have a nice sort of pick up in their retirement savings, so a nice little incentive for their future.
Rachel Pether: (37:33)
Well that's actually a really optimistic note, and it would be a good place to end but we have actually had a question that I think is highly relevant. So, Mark [Birbeck 00:37:43], thank you so much for your question: Just as a counterbalance to the de-risking trend that we're seeing, do you think there's a role for pension funds to be entrepreneurial and support young businesses with capital? Which I guess sort of ties back to your previous comments about investing in innovation. And then: What is the future DNA of pension funds as an investor?
Ruston Smith: (38:07)
So a good question. I'm going to split this between two types of pension fund. So I've got defined benefit, who really are trying now to get to a place where they've got little or no dependency on their employer, which means that they will be de-risking. And so they will invest in private markets for sure, I've already called how they'll do that through income-generating assets.
Ruston Smith: (38:31)
But I think the future for the investment, particularly in start-ups, as the [inaudible 00:38:37] is described, is in the defined contribution market. We've got lots of people investing money with very, very long-term time horizons. And this is a perfect opportunity, with a good manager that gives good diversification across lots of ideas, acknowledging that sadly, yeah, there will be defaults, that we can invest in entrepreneurs in the underlying economy and then drive that through to get to a much better place.
Ruston Smith: (39:04)
And we do have the funds going in, there are lots of savings going in. We're building assets in the UK really quite quickly in defined contribution. We shouldn't get hung up on [inaudible 00:39:14] pricing, particularly for the younger end. There is a huge opportunity. But I think, to some extent, there'll be a change in mindset from where we are today, but it's one I know that the government's behind which is a very good thing.
Rachel Pether: (39:27)
And could you also see the sort of investment in start-up ... I mean, that could fall under an ESG agreement couldn't it? Because it's that social side, it's supporting young entrepreneur's kind of capital for growth as it were.
Ruston Smith: (39:42)
Yeah. And I think actually, Rachel, that the new world should be about sustainability. So any start-up should be thinking about the learnings from the experience we've just had, thinking of the future. And to be a really successful, sustainable business will be all the good elements of ESG.
Ruston Smith: (40:00)
So to bring that together, will be an attractive proposition for a pension fund. Obviously, providing that the idea is good in the first place because we do need to make money.
Rachel Pether: (40:10)
Absolutely. That's true, you need to pay those pensioners because that would probably cause even greater social unrest.
Ruston Smith: (40:19)
Yeah.
Rachel Pether: (40:19)
So we have time for one more question, and my question is: Why do you not have your recent Pension Personality of the Year award up on the bookshelf behind you?
Ruston Smith: (40:28)
So, really simple answer: it hasn't arrived. It's in the post apparently, so I'm very excited. Thank you.
Rachel Pether: (40:39)
Excellent. Well, maybe we'll need to do a follow-up and you can have it in the background.
Rachel Pether: (40:42)
But Ruston, thank you so much, I knew it would be a lot of fun talking to you today. And thank you for your insights and your eternal optimism.
Ruston Smith: (40:51)
Thanks very much indeed Rachel. I hope your finger gets better.