2020 Knowledge Brokers

Stephen Woodcock

London and Woking, UK

Stephen Woodcock has generally been in the right place at the right time over the course of his career. As a principal specialist in liability-driven investing at Mercer, Woodcock got heavily involved in the risk management strategy in the mid-2000s when it was just starting to take off in the country’s largest pension plans. “It was an exciting time,” he said.

Today, he works with some of the UK’s largest pension funds and advises clients on investment strategy to manage asset and liability risks including longevity risk hedging for portfolios ranging from $1.3 billion to $13 billion in assets. He is also the chair of Mercer’s hedging oversight committee in the UK, where he helps work on views around liability hedging and other risk management strategies.

He finds LDI “invaluable” for running a pension scheme, especially given the events of this year. “The simple fact of the matter is that had we not done that, the pension schemes would have potentially found themselves in a situation unmanageable in terms of the burden they would have placed on their sponsors for additional contributions,” he said. “I think it exemplifies the importance of the risk management strategy in running a pension scheme.” 

CIO: What (actionable thing) have you learned over the course of your career that has proven itself this year?

Woodcock: You can invest as though you know what will happen next or you can invest in the knowledge that you don’t. There is a spectrum between these two points, but I think many investors have a degree of bias towards the former. People like forecasts of what is good to invest in and what is not (see the next two questions). People understand return targets better than they do measures of risk. It is true that markets sometimes throw-up a fantastic opportunity for which the risks of loss seem minimal—AAA ABS spreads at over 400bps in some sectors in mid-March were one of these—but they are fleeting and may be difficult to exploit in size. What I have learned is that it is mostly far better to invest for an uncertain future than for a forecast. The Global Financial Crisis, the inexorable fall in long-term interest rates over the last 20 years, Brexit and many other things besides have all bucked investors’ expectations. Even if a risk is recognized (such as climate change), its potential impacts may be highly uncertain. The COVID crisis is the latest example of this, but it won’t be the last. 

CIO: What investments (specific securities or sectors) look good to you now? And why?

Woodcock: At a top-down, asset-class level, the really compelling opportunities in credit markets have passed, but ABS markets have been a little slower to recover than mainstream corporate credit. Although broad markets have recovered, there will still be individual issuers and sectors in distress as a result of COVID-19 control measures and an opportunistic distressed debt strategy could benefit from this—a closed-ended vehicle calling capital as the opportunities arise (and so not investing if they do not) may be best placed.

CIO: What ones don’t? And why? 

Woodcock: Overall, the uncertainty principle applies in these conditions: avoid concentrations of risk, do not take more risk than is needed and certainly not more than you can afford. If a pension fund was planning to de-risk but was unable to implement pre-COVID, the opportunity should be back, at least as far as risk assets are concerned.

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