Tailored Plan investor update April 2020

Dom Byrne

by , Lead Investment Strategist at BlackRock

07 May 2020 /  

07
May 2020

Measuring tape icon in white against a pink and blue background

Hi, I’m Dom Byrne from BlackRock, and I’m here to give you an update about the Tailored Plan, which you are invested in.

How did the plan perform compared to the market, over the last three months? Did we have a good quarter or a bad quarter?

The first quarter of 2020 is one for the history books, as coronavirus caused unprecedented medical, economic and human challenges. The rapid spread of coronavirus around the globe, the economic repercussions and the high degree of uncertainty around the severity and length of this virus, has led to incredible moves across stocks, exchange rates, commodities and government bonds.

In a matter of weeks, global equity benchmarks fell from record highs into a bear market, which means a market where the prices are falling (source: BlackRock, as of 31 March 2020). Global stocks have fallen by over 20% (as measured by the MSCI World Index) and the FTSE All Share-TR Index (UK Stocks) plunged by 25%. (source: BlackRock, as of 31 March 2020). US 10yr Treasuries and Gold were two of the few asset classes to provide some form of safe haven during the quarter but even these were subject to a rollercoaster ride as investors looked to sell in an indiscriminate fashion.

The market downturn has a more pronounced effect for Tailored Plan investors who hold a greater allocation of what we refer to as “risky assets”. This means that longer-dated vintages, designed for savers that have a long time (e.g. over 20 years) to their retirement date, have underperformed the shorter-dated vintages (where our investments are more suitable for investors approaching and navigating retirement).

Our portfolios are “fully invested” across company shares and bonds depending on when an investor expects to retire. Whilst these periods are challenging, no one likes to see pension savings decline; we believe that a key to retirement success is ensuring that individuals remain invested, even in times of market stress. When we approach retirement, customers are even more aware of the value of their pots and whilst customers have experienced significantly less losses here – negative returns can often lead to them selling out of investment strategies.

Our policy of being “fully invested” is based on time horizon. When we have many years to retirement, we hold more riskier assets such as stocks and property because over the long-term we expect them to generate superior growth to lower risk portfolios. When we approach investments, we hold bonds that don’t expect positive returns all the time, but have diversification properties when held alongside stocks to reduce the impact of losses. We also design our strategy to facilitate drawing down income through retirement, so we hold allocations to stocks to help grow the portfolio over the long-term even in these “at retirement” portfolios. Even when we retire, let’s say at the age of 65, we still have to manage our portfolios with the expectation that customers will want to remain invested and drawdown an income for several years.

Risk: Diversification and asset allocation may not fully protect you from market risk.

The other important point to consider is that timing markets in periods of stress is very difficult to execute with repeatable success. We have seen this over the decades with periods of stress followed by periods of recovery, mini rallies followed by further weakness. It’s why we talk about recoveries having a “V” or a “W” shape, or several other letters in the alphabet. Our approach doesn’t aim to time markets during or after these periods of stress so we set a long-term approach that gradually de-risks over time as opposed to responding or forecasting short-term events. This, as mentioned, doesn’t mean you will never see losses to your portfolios but by considering some of the key risks such as market risk, inflation risk and longevity (the risk of outliving our savings), and managing those risks through time, we set a long-term plan for PensionBee customers that may help them save for and spend in retirement.

What can savers expect for the next quarter?

The coronavirus pandemic is set to deliver a sharp and deep economic shock. Stringent containment and social distancing policies will bring economic activity to a near standstill, and lead to a sharp contraction in growth for the second quarter. However, provided government intervention aimed at supporting households and businesses through the shock is swift, we would expect markets to recover with limited permanent economic damage over the long-term. This includes drastic public health measures to stem the spread of the infection, as well as coordinated monetary and fiscal policies to prevent disruptions that could cause lasting economic damage.

We see encouraging signs from major central banks and governments that such a monetary and fiscal response is starting to take shape. The governments and central banks responses have been swift – and we expect the total government intervention to be similar in size to that of the global financial crisis in 2008, but compressed into a shorter time frame. While the shock is of unknown depth and duration, we see the shock as akin to a large-scale natural disaster that severely disrupts activity for one or two quarters, but eventually results in a sharp economic recovery.

Markets, in our view, may ultimately settle down if three conditions are met: 1) visibility on the ultimate scale of the coronavirus outbreak and evidence the infection rate has peaked over the long-term; 2) quick and coordinated government and central bank response; and 3) confidence that financial markets are functioning properly.

At the time of writing (14 April 2020) we have seen a short-term recovery in the portfolios but it is too early to call an end to the volatility. We cannot with any certainty pinpoint a specific date or level in markets that will give us the confidence to say, “it’s over”. However, over the long-term we still believe that owning a diversified portfolio of stocks and other assets with the potential to outperform cash will be beneficial and that, through adding assets such as UK government bonds we can help manage risk for customers as they approach retirement.

No crisis is ever the same but historically, after every period of market fall, a rebound follows and so whilst it is uncomfortable living and working (and saving) through this crisis, we believe savers should take a long-term perspective.

One positive has been the strength and depth of our investment team, our investment process and our continual engagement with PensionBee throughout the crisis. Despite rather unusual working conditions, the Investment Committee who are responsible for overseeing the strategy (and the portfolio managers who ensure contributions are invested in line with our long-term plans), have been able to function as normal. I am proud of how my colleagues have all come together in this challenging time and proud that the team have been well equipped to look after the savings of PensionBee customers.

How has BlackRock driven positive social change in the past quarter?

The past quarter has presented multiple challenges to people in every corner of the planet from health, social and economic perspectives. While we are facing unprecedented events such as the coronavirus outbreak and witnessing the global markets struggle, we believe it is important to be reactive to the immediate challenges, while also staying focused on our longer-term commitments.

At BlackRock we are committed to supporting people affected by the coronavirus outbreak. As a part of our coronavirus response, BlackRock has committed USD $50 million to pandemic relief efforts globally to aid the healthcare workers and provide medical supplies, as well as support the foodbank networks for citizens. Here in the UK we are working with organisations such as the National Emergencies Trust to support the urgent needs of those most affected by the outbreak.

Keeping our long-term aspirations in mind, BlackRock has also announced the launch of the BlackRock Foundation earlier than planned, with the aim to broaden the firm’s philanthropic investments in economic mobility, financial resiliency and sustainability. “The contribution we’re making – in line with our purpose as a firm – will support our commitment to creating greater financial well-being and advancing sustainability,” said Larry Fink, Chairman and CEO of BlackRock. “These funds will be strategically deployed to partners and programs aligned with this mission, helping catalyse new and innovative ideas that support social and economic progress for more people around the world. The BlackRock Foundation will support our conviction that the transition to a more sustainable economy must be inclusive, fair and just.”

Recognising our social responsibility as a large asset manager, we constantly look to enhance our approaches to stewardship as Larry Fink has stated in his latest letter to the CEOs. This past quarter we have worked on intensifying our focus and engagement with companies on sustainability-related issues and proactively promoting effective disclosures of climate-related risks.

During our engagements, we advocate for disclosures aligned with the reporting frameworks developed by the Task Force on Climate related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) and are already seeing results. These frameworks consider the physical, liability, and transition risks associated with climate change and provide guidance to companies for disclosing material, decision-useful information that is comparable within each industry.

Our Q1 2020 Stewardship report provides multiple case studies and insights into our stewardship activities in this quarter, which you can access at the following link. To pick one example, we recently engaged with the heads of ESG and sustainability of an Irish construction company to discuss its approach to managing and reporting on its sustainability practices suggesting aligning its climate risk reporting with the TCFD framework. Cement production represents 15% of the company’s revenues, however accounts for 80% of the company’s total carbon footprint. To manage these greenhouse gas (GHG) emissions challenges, the company is focusing on its emissions intensity (520kgCO2/t by 2030) rather than setting an absolute GHG target that would constrain cement production volumes.

Nonetheless, the company met its 2020 target and is seeking to further reduce its GHG emissions intensity by an additional 8% by 2030. We are encouraged that the company has set an ambition to achieve carbon neutrality along the cement and concrete value chain by 2050. This science-based target (SBT) at a 2-degree scenario has been independently verified to be in line with the Paris Agreement. From a reporting standpoint, we were also encouraged to learn from the engagement that the company is in the process of enhancing disclosures and is reviewing both the TCFD and SASB reporting frameworks. The company indicated that it welcomed the TCFD recommendations and is actively participating in TCFD’s preparers forum. While it is early days in the company’s reporting journey, we are encouraged with the tone of our engagement. We will be looking to the company to align its climate risk reporting more explicitly with those recommendations going forward

Risk: Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.

Views expressed are of BlackRock.

Risks warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

BlackRock DC LifePath UK Risks

Credit Risk: The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due.

Equity Risk: The values of equities fluctuate daily and a Fund investing in equities could incur significant losses. The price of equities can be influenced by many factors at the individual company level, as well as by broader economic and political developments, including daily stock market movements, political factors, economic news changes in investment sentiment, trends in economic growth, inflation and interest rates, issuer-specific factors, corporate earnings reports, demographic trends and catastrophic events.

Derivative Risk: The Fund uses derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk.

Liquidity Risk: The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Important information

Rates of exchange may cause the value of investments to go up or down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Any objective or target will be treated as a target only and should not be considered as an assurance or guarantee of performance of the Fund or any part of it. The Fund objectives and policies include a guide to the main investments to which the Fund is likely to be exposed. The Fund is not necessarily restricted to holding these investments only. Subject to the Fund’s objectives, the Fund may hold any investments and utilise any investment techniques, including the use of derivatives, permitted under the Financial Conduct Authority’s New Conduct of Business Sourcebook which contain the rules by which investment of the Fund is governed. The BlackRock Life Limited’s notional fund units have a single unit price. The unit prices are normally calculated on each business day. For performance reporting, notional units are valued at special closing prices on the last working day of each quarter to enable comparison with the relevant benchmark index.

Issued by BlackRock Life Limited (“BLL”), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. The Fund described in this document is available only to trustees and members of pension schemes registered under Part IV of the Finance Act 2004 via an insurance policy which would be issued either by BLL, or by another insurer of such business. BLL’s registered office is 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000. Registered in England and Wales number 02223202. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2020 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Your updated fact sheet will soon be available to download in the BeeHive. If you’d like to ask a question in the next update or share your thoughts, you can get in touch with PensionBee via email or Twitter.

As with all investments, past performance is not indicative of future performance and you may get back less than you start with.

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