The world is now facing two megatrends -- climate change and new strains of the coronavirus -- which are having major economic and societal impacts.  To understand how those trends affect pension fund management, we need to break them down using PEST analysis, which considers the macroeconomic environment.  PEST examines a management strategy in terms of politics, economics, society, and technology.  

Politics refers to the political and geopolitical risks of a particular country and region, as well as support for platformers, such as GAFA.  These factors have a significant impact on risk assets.

Economic analysis under PEST focuses primarily on inflation risks.  The current supply chain disruptions, which are one of the causes of inflation, will fade once the coronavirus recedes; therefore, they don't pose a long-term problem.  Furthermore, since the global economy is basically strong, the return to pre-pandemic monetary policies will not cause risk assets to fall sharply.

PEST's society lens looks at ESG, among other socially relevant factors.  The short-term impact of ESG on asset prices is expected to be small, as many analysts predict a negligible impact on the risk-return of stocks.  Of course, we must commit ourselves to activities that will last several decades, but realizing a sustainable society and managing risk-return operate from different perspectives.

A technology analysis typically examines factors such as DX and vaccine development.  Increased efficiency has boosted productivity and data is an increasingly valuable asset.  Companies that fail to adjust or keep up will be weeded out.  Technology is an important factor in determining the rate of economic growth and the pandemic has only accelerated this trend, which is a positive factor.

Since the global financial crisis, investing in passive management of capitalization-weighted indexes has provided satisfactory results, but I believe that strategy will become less viable in the future.

With traditional assets, we can consider factor-based carry and roll-down strategies for bonds, and selective equity investments and low-risk equity management for stocks.  Capitalization-weighted indexes are not necessarily efficient, and even overvalued stocks can be held, so they cannot be theoretically correct investments.  Pension funds can fashion their own investment policy, so they may want to consider giving some purpose or message to the core portion of the investment.

Alternative investments are another option.  Although many pension funds may not be able to engage in alternative investments due to management difficulties and liquidity considerations, funds that have adopted them have achieved stable performance.  Also, management of alternative investments can be left to trust banks and gatekeepers once they reach the stage where continuous investment is possible.  Of course, as a fund, it is essential to monitor investments, but there is no need to manage everything yourself.  I believe that kind of shift in values will be necessary.

If you are incorporating active management or alternative investments, it is important to perform a risk factor breakdown to determine what and how much risk you are assuming across your portfolio. 　This process will allow stress tests to simulate in detail the impact of geopolitical risks and climate change in the short-, medium-, and long-term.

Basically, pension fund management is a matter of drawing up a blueprint and then sitting back and letting the manager handle it instead of moving left and right with the market.  In order to construct the blueprint, you have to carefully assess which events and phases your current portfolio is vulnerable to.

When we spoke to pension fund directors, they told us they have been unable to communicate directly with other pension funds for more than 2 years now due to the coronavirus, and that their opportunities to learn what other pension funds are doing with their investments have been drastically reduced.  Many of their interactions with managers are online, which this has led to a general decline in the substance and frequency of communication.  This means there are fewer new proposals, and operations tend to be centered on maintaining the status quo.