I read with interest the excellent recent commentary on the fallout from the liability-driven investment implosion and its impact on long-term investment by pension funds, first the op-ed by Michael Tory, co-founder of Ondra Partners (“UK pension fund crisis shows there is no capitalism without capital or risk”, Markets InsightOctober 1), and the follow up letter from Richard Buxton of Jupiter (“If there is to be an LDI inquiry, here’s a suggestion”, October 24).
The folly of trying to make something risk free, namely gilts, more risk free with leverage, to spice returns, is for the birds. The unceasing focus on trying to eliminate risk has led mainstream investors, namely pension funds, into the cul-de-sac of low yielding assets. They appear low risk and can be priced daily reflecting any volatility. What has this achieved? The elimination of risk? Clearly not.
It has though confined pension funds to low long-term returns which will ultimately leave us with unfunded pensions, every bit as toxic as unfunded tax cuts.
The debate needs to switch tack to allow and support long-term equity investment by those best placed to do so. If the UK wants to break free from its perennial productivity challenge, equity investment is the answer, not exotic derivative strategies.
Executive Chair, BGF
London WC2, UK