Forward thinking challenges ahead of Investment Conference

It’s that time of year again and while the 2021 Investment Conference won’t be a face-to-face event there is plenty to look forward to. Looking ahead to the event, PLSA Chair Richard Butcher, is setting delegates a challenge.

I want some forward looking metrics. Help!

Almost exactly a year ago Scotland hosted its last, legal, major conference. The pensions industry, tentatively, nervously and with fist bumps instead of handshakes gathered in Edinburgh. It was a quieter Investment Conference than normal but still a resounding success across all our metrics. A few days after I closed the last session we were plunged into lockdown. 

That was the last time I was on a plane and, apart from a day trip to Wales last summer, it was the last time I left England. It’s hard to believe it’s been almost a year. 

And yet, here we are again. Looking down the barrel of another Investment Conference, albeit this one digital. 

As ever there is a packed agenda of stuff to savour but I’m not here to bang the drum for it (well not too much). Instead, I thought I’d set you a challenge and I’d love to hear your thoughts.

The recognition of the long-term financial risks of climate change is finally gathering pace. There is much work still to do (if you want to get a feel for the scale of the work just take a look at our A Changing Climate report launched at October’s Annual Conference) and a few people still to convince; but we are moving forward. All of you will be very familiar with the various governmental and regulatory initiatives – many of which we’ll debate during conference. But there is, I think, a vital piece missing. 

At the same time, the Government has a conundrum. As a nation, and thanks to Covid, we are heavily indebted. This limits their ability to spend on encouraging the longer-term economic activity needed to kick-start and sustain a recovery. 

One of the answers it has landed on is to encourage us, the pension funds, to provide that capital instead. They’ve set up a working group to work through the technical challenges. One of those challenges and the piece missing in investing in a climate away, is the metrics. 

When I get an investment report, it generally has three parts. 

The first part is a look back at the markets. This is often fairly pompous and almost self-congratulatory in nature. It’s almost as if the author were calling the market right albeit with the benefit of hindsight data. Despite all of the hours put into producing these things I find they’re rarely of any use. They are subjective and do nothing but explain what has already passed. 

The second part is the numbers. Three month, one, three and five year performance against benchmarks. This is a short section which is useful to a point but dangerous. It is dangerous for two reasons. Firstly because it panders to our activity bias, if it looks broken we should fix it when sometimes the right answer is to do nothing. Secondly, sometimes the numbers can look fine but there’s still a problem.

The third part is the manager analysis. This is a sort of light touch refresh on the due diligence that was done on the manager many moons ago. It’s often RAGed and provided the indicators are green, this part of the report seldom gets much attention. Which is a shame because I think it’s the most important part of the report. It is the only part of the report that looks forward. 

When I set my investment strategy I set an investment objective that includes a return needed, the level of liquidity I need, the amount of risk I can afford to take, how much I want to pay, how I’d like certain risks (e.g. climate) to be managed and other things. When I select a manager or managers, I do so because I have a degree of confidence they can deliver to this mission. What my investment reports do, by and large, is to look back and opine on whether they did so. What they don’t do and what I’d really like them to do, is to look forward and tell me whether my degree of confidence can be maintained. 

What we need are a bunch of forward looking metrics. Our investment reports shouldn’t major on “have we been on track?” but “can we stay on track?” 

The challenge? What could those metrics be? 

Enjoy the conference.

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