Britain’s biggest pension fund has hoarded cash reserves in anticipation of further market uncertainty as companies and countries grapple with the fallout of coronavirus.
Nest, the UK state-backed pension scheme with 9m members, making it Britain’s largest, said its allocation to cash in its main investment funds stood at about 5 per cent, compared with 1 to 2 per cent normally.
Mark Fawcett, chief investment officer at the £10.5bn pension fund, said that while he did not know “which direction the market will go”, there was a “bunch of risks the market seems to be feeling fairly benign about”.
These risks included the possibility of a second wave of outbreaks and the rapid spread of the virus in emerging markets such as Brazil, as well as a lack of clarity about the pace of recovery and whether people would continue to stay at home even if economies were opened up.
“We just don’t believe a V-shaped recovery is very likely,” he said, referring to a fast uptick in growth. “Clearly if a viable vaccine is found that changes things and reduces those downside risks. But it will take a while to vaccinate the world.”
He said the pension fund had taken the opportunity to reduce some holdings, such as in high-grade credit, to build cash reserves. The pension pot has a steady stream of money coming into it from members and has chosen to put some of that aside rather than invest.
Mr Fawcett added that the allocation to cash at 5 per cent was “probably as high as we would ever get”.
“If we see some of these risks manifest themselves, we have the ability to increase holdings where we think we need them,” he added.
Jan Erik Saugestad, chief executive of Storebrand Asset Management, the Nordic fund house that oversees large chunks of pension assets, shared Mr Fawcett’s concerns, saying a U-shaped recovery was more likely.
He said that while economic stimulus from governments would work, it would take time. “We are cautious, given the levels and risks we are seeing right now,” he added.
According to a survey of fund managers from Bank of America this month, just 10 per cent expected a V-shaped recovery, while 75 per cent anticipated a U- or W-shaped one.
The poll found that managers were holding large amounts of cash, with allocations at 5.7 per cent, well above the 10-year average of 4.7 per cent.
But others struck a more optimistic note. Elliot Hentov, head of policy research with the global macro policy research team at State Street Global Advisors, the world’s third-largest asset manager, said he was “slightly more optimistic than the consensus” and in line with how equity markets were pricing a recovery.
He added that he expected significant breakthroughs over the summer, whether in treatments, contact tracing or other areas that could help prevent a second lockdown.
Nest’s Mr Fawcett said it was a challenge to run the fund during such market uncertainty. “It is clearly tough, because we have to make sure our members have enough exposure to growth assets that we can build a good pot for them over years, but we don’t want to give them excessive volatility,” he said.