The war in the Middle East has led to fears for the global economy. Three investment chiefs of large pension funds shared their views of whether and how they have changed anything as a result, speaking at Pensions UK’s Investment Conference in Edinburgh on Tuesday. 

The current turbulence is not fundamentally different from what investing is always like – inherently uncertain and fraught with risks, suggested the CIO of the People’s Pension, Dan Mikulskis. 

“The reality is, it is always uncertain. There is always a lot of volatility in markets,” he said. “It always feels uncertain, it always feels uniquely uncertain when you're in the moment. But I'm not sure that's actually really true. And also we should embrace the volatility, right? That's why you earn excess return.” 

The basis to investing through volatility are systems and processes, he argued. 

“The actual setting up the asset ownership models I think is really important,” said Mikulskis, noting that People’s has been building out its asset ownership model over the last two years – a relatively short time compared to some other schemes. 

Despite not having a long track record, he identified easy communication and clear resposibilities as key ingredients for responding to crises. 

“We haven't been through loads of crises obviously yet as a team, but some things I think have been good is being able to have quite a flat structure, where you've got the senior decision makers all very accessible, so you can get everyone together quite quickly when you do have a decision to make,” he explained, for example when transitioning assets. 

Having “really clear delineation of delegation from your stakeholders, in our case the trustee, to know exactly what parameters we have to operate in when we need to go back to them” is another important aspect, he said, stressing that this needs to be set out up front, “because it's really easy to kind of not do that work up front and suddenly you're in a scenario”. 

Others are less relaxed about capital market upsets, whether caused by war, liquidity strains or overvaluations. Joe McDonnell, the CIO of Border to Coast – an LGPS asset pool that will soon oversee £110bn in assets – said he agreed that investors should not overreact to events but nonetheless thinks recent weeks have brought significant challenges.  

“The obvious one, of course, is the geopolitical situation that we're facing now. The other has been, I would say, civil war in AI,” he said. 

The business models of software businesses are “under siege”, he said, with markets trying to predict whether AI will benefit or eradicate them, leading to considerable volatility within stocks, even if a particular index as a whole did not move much. 

A third concern emerging over the past eight weeks has been private credit, he said, noting “differences on private credit, where some investors who love private credit also love liquidity, which is great for them, but unfortunately that causes all types of issues for asset managers to generate that liquidity,” he added.  

McDonnell admitted he did not know which of the three themes – geopolitics, AI or private credit – will be the dominant one in the medium to long term, but revealed that the pool’s asset allocation committee has met more frequently over the last couple of weeks.   

“We're looking at a range of risk metrics to get comfortable with,” he said. 

Only half joking, he added that the pool has three scenarios, “not so bad”, “bad” and “very bad” - the worst being Covid, ‘bad’ being Russia’s invasion of Ukraine, and the least worst being where we are today.   

“Yes, emerging markets are off 8%, developed markets off 5%... it's certainly not a market correction, but it's something one has to be concerned about. And we have to do more scenario analysis to see how bad things can get. But at the moment, we're not making any changes,” McDonnell said.  

For Mads Gosvig, chief officer pension investment management at Railpen, which manages the assets of the Railways Pension Scheme, two things are important – that the team takes a very long-term view and that it is supported in doing so.   

“We are blessed with a very strong trustee board that knows that we are there for the long term. So panic is not necessarily something that pops up,” he said. “But that doesn't come on its own. It's of course with processes in the organisation to run, investments to be prepared for if you need to do something, be ready to seize the opportunities that pop out of most crises that will appear and have that preparedness and agility in the organisation.”  

While equity valuations are high and credit spreads are relatively tight, the CIOs still see opportunities. For Gosvig, who describes himself as an AI optimist, it is the belief that global equities will benefit from the next generation of the use of AI across different companies. Mikulskis and McDonnell both point to real assets, with property and infrastructure showing promise, particularly in the UK. 

“We're looking to accumulate more direct real estate in the UK. We particularly like single family housing. We just bought an estate in Cambridge,” said McDonnell. “We could do more of that, and I think that's something that obviously the government wants to see more of and I think it's also a very good income play for us.”  

Along with real estate, McDonnell cited UK life sciences, where he thinks the pool has a competitive advantage, and energy infrastructure: “Let's do a lot more energy infrastructure. If anything that the last week has proven is, we need to do perhaps even more there.”