Pensions investment update

Hello.  Against the backdrop of rising inflation and interest rates, coupled with frequent bouts of volatility, conventional attitudes towards investing have been challenged over the last months or so. 

My name is Ryan Medlock, senior investment development manager here at Royal London, and I'm delighted to be joined by Trevor Greeson, head of MultiAsset at Royal London Asset Management. 

And Trevor is here to make sense and explain what has happened to your pension. Trevor, welcome. 

Hi there. 

Now a lot of people watching this video will have seen falls in their pension values over the last year or so, particularly those in lower risk portfolios. So can you perhaps start by explaining why that has happened? 

Yes. I mean, over the medium and longer term, pension values have increased a lot, as you know. But over the last year, what we've seen is the effects of rising interest rates, particularly on the fixed income part of the portfolio, has caused a drop in values, particularly at the lower risk end of the spectrum where the portfolios have got more in bonds. 

Of course, bonds generally are lower risk investment than company shares, which are much more volatile. But when interest rates are rising, the interest rate expectations are rising. There can be a change in capital values and that's what we've seen. So the bonds have lost value over the last year or so. The stocks not so much. They were quite weak last year, particularly the US technology stocks, but they've actually bounced back very strongly.  

That's great.  I think for me this particular phase of the business cycle is really highlights that the benefits of broad, diverse vocation. Could you perhaps elaborate why a diversified investment portfolio can help mitigate the impact of inflation and market shocks?  

Yes, I mean, you don't put all your eggs in one basket. So if you look at the portfolios that we manage, we've got some assets in the portfolios designed to generate long term growth and those would be company shares both in the UK and internationally, also commercial property. And those asset classes have  been inflation by a very wide margin over the long run. We've also got assets like commodities which could help to hedge against short  term inflation shocks.  

So this big cost of living crisis we've seen that commodity exposure has been really beneficial. Commodity prices in sterling terms have risen by about % two years running. And then you've got the fixed income part of the portfolio, which is a like a shock absorber. It tends to be lower volatility and that helps to reduce the sort of day to day fluctuations in the portfolio.  

All of these asset classes make sense over the long run. In the shorter term,  sometimes one is doing badly, like we've seen with bonds,  but others are doing well at the same time. So having that mix really gives you a smoother journey.   Perfect. Okay. Crystal ball time. So looking ahead to the end of , Freddie, and as we perhaps progress into in a few months time, what can we expect from the rest of this year?  

Well, well, life is always very uncertain. So the key point is we always start   with that basic diversified portfolio designed to be at the right sort of level of risk for different investors risk appetites. But at the margin, we're active managers, so we will  shift money between asset classes on a tactical basis.  

And at the moment, we've shifted our money, if you like, overweight shares.  We bought equities during the mini budget crisis last year, which was a real market low, and we've been overweighted in the funds since then.  

And what we've seen is some economic recovery. You wouldn't get too excited by it, but it's better than people thought last year that we'd be seeing by now. And you've seen inflation, particularly in America, come down.   That's also been a benefit. Where we had from here is it's always difficult at the moment.  

The markets are trading on the basis   of the belief that the US can avoid a recession. We're not so sure the US and other economies will avoid recessions after all of these interest rate rises. So we're watching very closely and if we see signs of a broad slowdown from this level in the world   economy, what we're likely to do is then deemphasize the equity markets   the company shares and move money at the margin back into government bonds.  

Now, a couple of years ago, when government bond yields were very low,   there was risk of losses and we were actually underweight in bonds last year as interest rates rose. But if we go into a weaker period, central banks may start cutting interest rates and then the bonds will do well. 

So the bonds tend to be more defensive in the slowdown. So at the moment, overweight shares, if we see signs of a move towards recessions   as the year progresses, then we're likely to overweight government bonds.   Brilliant.

Thank you, Trevor, and thank you all for watching today. If you would like more information on our multi asset investment portfolios, please go to our website at Royal London dot com.  

Thanks for now.  Thank you.