As the Local Government Pension Scheme (LGPS) continues to mature there is a greater need for cashflow management and therefore portfolio diversification, the senior investment manager at the Greater Manchester Pension Fund (GMPF) has said.
Speaking at Room151’s LGPS North conference in Manchester, Abdul Bashir said: “Diversification is probably the only tool we [the LGPS] have to reduce the impact from extreme tail risks.
“From an LGPS perspective, or more specifically GMPF perspective, we’re starting from a position of strength by being 100% funded, but there are challenges ahead.
“As the scheme matures, liquidity and cash flow management are becoming increasingly important.
“So, there’s a need for diversified returns and diversified income streams, and there is probably a natural limit to the proportion of assets that we [GMPF] will be comfortable investing in private markets.”
While indeed it has been the case that correlation over the past few years has been high compared to history. The long-term average is much lower and the future could be significantly different.
60/40 portfolio
Bashir stated that diversification is often associated with the 60/40 portfolio. This is an investment strategy where investors allocate 60% of their portfolio to equities and 40% to bonds.
He said: “Recent criticism of this strategy has been the high levels of correlation between equities and bonds experienced over the past few years, particularly in 2022.
“One thing to bear in mind here is that correlations are not fixed and will change over time.
“While indeed it has been the case that correlation over the past few years has been high compared to history. The long-term average is much lower and the future could be significantly different.”
As the scheme matures, liquidity and cash flow management are becoming increasingly important. So, there’s a need for diversified returns and diversified income streams.
Room151’s LGPS Private Markets Forum
21st June, 2023, London FREE for LGPS Practitioners
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‘Diversification is the only free lunch in investing’
During the session, Bashir highlighted the common phrase that “diversification is the only free lunch in investing”, which is attributed to Nobel Prize winner Harry Markowitz. But, he cautioned that “nothing is free in life”.
In the same panel, Richard J Tomlinson, chief investment officer at Local Pension Partnership Investments, stated that he agrees with the phrase in a world that is geopolitically stable and where inflation is contained.
“However, I’m not so certain that is what holds today, in a world where we could be looking back in five years’ time to a world that looks quite different to where we stand today geopolitically,” he said.
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