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17 December 2020

USS Investment Management update - December 2020

As I look forward to 2021, it would be hard to imagine a more difficult time to try to predict the future.

While news of a vaccine provided a welcome shot in the arm (pun intended) for markets, the threat from Brexit – even with a deal – plus the uncertainty of a new US presidency, makes future-gazing particularly tough.

What we do know is that Covid-19 pulled the rug out from under the UK in a dramatic fashion. Already weakened by Brexit, this country suffered more than many others during lockdown. Commentators foresee the UK getting back to pre-Covid levels of output no sooner than 2022 and taking more than 10 years to match the pre-Covid growth trajectory. And even these downbeat forecasts may prove to be too rosy. Brexit will bring additional challenges to businesses and consumers at the worst possible time, irrespective of whether a skinny deal will be agreed with the EU before New Year’s Eve.

It is indeed hard to see certain sectors bouncing back quickly to pre-Covid levels next year. Working patterns were forced to change rapidly and even once the vaccine is rolled out – which will take time - it is hard to imagine millions of people rushing to return to a 9-5pm daily commute. High street retail and leisure sectors will take time to recover as will the arts and these sectors employ huge numbers of people.

It was back in March when I realised that we were bearing witness to something truly dramatic. The crash in equities was matched by a sharp and unusual downturn in bonds – something that never happens in normal markets as the two move in opposite directions.

As an active investor in bonds, we were able to move quickly to buy into a market that was governed by fear rather than typically rational thought.

But while we were able to do much to mitigate some of the worst impacts of the pandemic, looking forward we see that risky asset values have rebounded and government bonds, seen as a safer haven for long-term investors, remain very expensive.

For USS, with an unusually large allocation to private assets, we will continue to do what we’ve been doing for nearly 20 years and look for good companies in the private sectors with defensive characteristics in which to invest our members and their sponsoring employers' money. Without the vagaries governing the pricing of listed companies we have become skilled at spotting opportunities and then responsibly stewarding these investments.

During 2020 our Private Markets Group put nearly £4 billion of additional capital to work in high-quality assets with solid returns. This is a great result, particularly when these transactions were completed against the backdrop of a global pandemic.

Examples include PECO Pallet in the US, bp’s freehold property estate of 199 UK forecourts, social housing investor RESI, and G. Network, a fast-growing fibre broadband company upgrading internet connectivity in London.

We are keen to do more and look forward to next year and the opportunities it brings. For example, we are actively looking to invest in more green energy because it makes good financial sense and because it’s the right thing to do.

On that particular theme, during 2020 USS Investment Management took some major steps forward by announcing plans to exclude and ultimately divest from certain sectors. Our DB fund is now all but out of tobacco which is pleasing and we are working hard to exit the others where investments have been identified that are within our control. We remain open to announcing further exclusions as time goes on.

There is little question that ESG will continue to be a major theme next year as investors grapple with the major issues of climate change and how we can better influence governance and social issues within the companies in which we invest. Going forward we plan to explicitly incorporate climate change considerations in our long run return forecasts and to build a range of scenarios to run stress tests on the of impact of alternative climate outcomes and policy responses. We know there is a lot more to done so stay tuned for further announcements next year.

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.