How can long-term investors such as pension funds find returns for their members while protecting portfolios through market events and geopolitical upheaval?   

When it comes to investing for the long term in the face of uncertainty, Richard Tomlinson, chief investment officer at Local Pensions Partnership Investments, cites US general Dwight Eisenhower, who reportedly said that “plans are useless, but planning is indispensable".  

While investors will not be able to predict the future to any degree of accuracy, they still need to try and build a portfolio that performs in most scenarios based on what is “sensibly knowable”, and which will survive the unexpected blows, argued Tomlinson.  

"It's extremely easy to say, it's really hard to do," he said speaking at mallowstreet’s Local Government Pension Scheme Indaba on 16 April, as he offered his view on how pension funds can increase their chances of delivering this outcome. 

First, he advised investors not to pay too much attention to daily headlines and instead to be “embracing uncertainty, plan extensively and think probabilities”, relying on their governance committees and underlying portfolio management processes. 

This means having a central case and plausible alternative scenarios. A central case might be an expectation that there is a 50-70% probability that the scenario occurs, which informs the long-term investment strategy.  

“But then you do have to think, ‘What if’,” Tomlinson remarked. He advised the investors at the event to ask themselves what bets they are taking not just explicitly but also implicitly; and to consider what happens if these turn out to be wrong.  

One of the things that frequently catch people out are structural versus shorter term cyclical developments, ranging from geopolitics, mean reversion and demographics to inflation, growth and interest rates.   

What can also take less experienced investors by surprise is that while something might reasonably lead to a negative outcome, governments and societies are usually unwilling to take short-term pain. When a problem is sufficiently big, “the rules of the game get rewritten”, Tomlinson said. 

This is just one of many difficulties in constructing long-term portfolios. Another is that decisions are never neutral. One audience member argued that “it's better for a person's reputation to fail conventionally than to succeed unconventionally” - because ‘no one gets fired for buying IBM’.   

Another investment decision maker noted that even where one correctly predicted a scenario in geopolitics or similar, it does not follow that they were also right in their view of what follows in terms of the economic and market outlook. The same audience member also noted that one difficulty with ‘bad’ scenarios is that “waiting for bad things to happen has never been a great investment strategy... the high returns do go to the optimist in one form”.  

Tomlinson agreed that "betting on the train wreck tends not to be a good idea for so many reasons".  

He thinks he bulk of a long-term portfolio should be skewed towards taking strategic exposures to “things that you expect to have a positive long-term profile”.  

Lastly, he advised investors to stay humble and not overemphasise how much they know.  

“Just write down your investment calls, then hold yourself to account later. If you're 55% right versus 45% wrong, that's really good,” he said. “The way you survive is by not betting too much on those outcomes, not getting overconfident.”