When I started out in investment consulting, very early on someone asked if I knew the difference between strategy and tactics in relation to investing. As I knew this consultant would tolerate very little fluff, I gave my honest answer: “err…ye-…err…no, actually, I suppose, not really”. “Strategy is long term and your strategy should get you to your end goal; tactical movements around this should take advantage of short term market opportunities”. Simple enough in theory. Although often blurred in reality.
In particular in relation to hedging, one of the most divisive conversations everyone seems to be having at the moment. I often hear the phrase “direction of travel” when people are discussing this. The implication is that hedging will form a larger and larger piece of the overall investment strategy, as schemes mature.
But what this fails to capture is the idea of tactically using hedging within an investment strategy. This should particularly resonate with those company representatives who fear they risk removing the only chance they’ve got of markets getting them out of their holes.
However, following last week’s interest cuts and further easing from Mr Carney & Co, now would appear to be a good time to be buying gilts tactically.
We seem to be in a position whereby gilts (or swaps) remain important strategic hedging instruments, but also offer tactical absolute return appeal. This latter concept gets very tricky when considered within the framework of a pension scheme as actuaries like to fit within a “gilts-plus” return framework. But then I never said investment was easy.
With this in mind, I think more trustees should challenge their investment consultant to explore the merits of tactically hedging interest rate exposure in the short term. Leave the strategic conversation to one side and work out how interest rate exposure is likely to be beneficial in absolute terms. If you can then afford to keep this protection in place, excellent. However, if not, when the economy does pick up, this hedging can be unwound if interest rates look more likely to rise than fall.
It doesn’t have to be a one way street. If you would like to discuss how to tactically improve your interest rate exposure, please get in touch.
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