Michael Koller: It is important to understand that there are a myriad of outcomes which are possible in the future.
It is thus very difficult to analytically say that one should invest in ground rents or not, because it might be a case that Corbyn is in favour or against it – we simply don’t know.
A prudent man’s approach is pretty much what life insurers do. They look at the entirety of their portfolio and don’t put everything into one basket and model it based on their past experiences.
It is more difficult to say that the world has changed and we have some ideas on how it is has changed, so what we do have is a raft of data, such for the equity markets that go back to 1929, which allows us to have the use of a simplistic assumption that the future is like the past as we had protectionism and populism in the past.
If you want to protect your balance sheet, you should look from a conservative point of view and the most important and notional guarantees that you are writing are interest rate guarantees. Today, there is a rather limited set of measures you can do to implement it as namely you can only use it to cash flow match.
"A prudent man's approach is pretty much what life insurers do."
The UK’s last liquid point was 50 years, which means that the neutral position is cash flow matching. Then you take more credit risk but in a measured way and then you will have a discussion as to whether you should tactically decrease or increase them.
If you take one step up from this, Prudential is a very big insurer and we do business in the socialist republic of Vietnam with the last liquid point being around five years. There, a part of your risk is taking this interest rate risk because you believe this market is growing.
As a corporate, you protect against this by diversification, so we have markets in Myanmar, Indonesia, Hong Kong, the US, and in the UK. Diversification as a corporate is one thing but have risk limits and adhere to them and don’t put too much in one basket.
Ian Coulman: It is about diversification and not being exposed to any one particular risk, wherever that may be.
We take the approach that diversifying across a broad range of asset classes and markets is important because there is little you can do about populism and politics within each country. But you can assess the impact that it will have on monetary or fiscal policies and determine from there the right approach and which markets you might wish to avoid.
"It is about diversification and not being exposed to
any one particular risk, wherever that may be."
We will have ongoing discussions with each of our managers to determine the right approach and which markets should be avoided. We will actively engage with them to determine the right approach. Ideally, we want to maintain diversification to mitigate against the potential risks wherever problems may arise.
We can have a reasonable idea as to where populism or issues are arising but we can’t mitigate against all of these risks.
Taking advantage of some of the disruptions caused by politics – and Brexit is a perfect example – as it was very much a binary decision. We couldn’t take much of a view on what was going to happen to equities or bonds during this period because it was a yes or no vote, but we could take a position on the currency.
We knew that if it was a remain vote, sterling was probably going to remain stable or appreciate slightly but if it was a leave vote it was going to fall sharply and we could put in certain strategies to take advantage of this.
