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6 August 2020

USS Investment Management update - August 2020

Since the dramatic market falls in March as a result of Covid-19, risk assets such as equities have held up remarkably well despite continued uncertainty over the economic impact of the virus.

Renewed hopes for longer-term solutions through vaccines or treatments, the gradual reopening across most developed economies following lockdown, as well as continued support from central banks have all contributed to keeping the market environment buoyant.

In June, the S&P 500 Index of the top 500 companies listed in the US recovered +40% since the low on 23/03, breaking above the 3000 level. This was particularly driven by strong performance in the tech sector which has been one of the winners of the Covid-19 crisis. The FTSE 100 also recovered albeit not as strongly and currently lags the S&P 500 by around 13% year-to-date.

Record purchases of corporate credit by central banks have also tightened credit spreads although not to the same extent as they were at the beginning of the crisis. Meanwhile, although Covid is still spreading fast among many emerging markets, both hard and local currency debt as well as emerging market currencies, have rallied to a greater or lesser extent.

But while in market terms things may seem rosy, the outlook is anything but. Many countries who went into early lockdown and managed to keep infection rates low are now struggling with the possible beginnings of a second wave. And with the onset of winter as well as the gradual withdrawal of state support for keeping people in jobs, the impact is hard to predict. This is likely to be even more marked for the UK as it exits the EU.

As a long-term investor, USSIM’s active investment strategy has been about working hard to navigate through this period of extreme turmoil and since the start of the year we have made some significant strides forward. Early on in the crisis this included shifting from dollars into sterling to lock in value. More recently we have increased inflation exposure, across both UK and other markets.

We have remained focused on acquiring high quality credit assets which, given these companies’ ability to access funding, should be a positive investment over time. More generally, we have also looked to ramp up our longer-term and fixed income investments in order to negate some of the impact of the market volatility we face. For example, we are looking to increase our Private Markets investments up to 35% of the scheme. These quality assets are well placed for pension schemes such as USS as they require long-term investment but offer the scheme some hedging qualities at the same time.

Most as these changes have been able to happen at minimal cost to the scheme in terms of fees because we are an active manager and therefore are able to do complex transactions in-house, rather than pay expensive external managers.

We are not finished yet, of course. As an active manager we are keeping a close eye on market developments and can move quickly to adapt. That said, it is clear that the impact of Covid has got some way to go yet and we will do our very best to react to changing situations as they arise – always with one eye on seeing through this crisis to paying the pensions that have been promised.

Nothing in this article should be construed as an offer, invitation or general solicitation to buy or sell any investments or securities, provide investment advice or to engage in any other transaction or service.