It’s not about the destination, it’s about getting the most from the journey

Travelling back from the PLSA Investment Conference in Edinburgh the other week I noticed something very strange. The 8:40pm flight was not the last flight of the night, as it often can be. There was a 9:15pm BA flight, but the strange thing was the labelled destination for that flight was the same as its origin – Edinburgh.

A colleague and I were pondering this for a little while trying to work out whether it was an error in the system or simply another way of telling passengers that missed the last flight of the day that the last bus to a hotel for the night is at 9:15pm.

As you do these days, we did some “googling” which simply confirmed it was a genuine flight that left Edinburgh at 9:15pm and arrived back, in Edinburgh, 3 hours later.

Perplexed we began wandering over to the BA information desk (we had some time to kill) and as we did we remembered this story from earlier in the week.

The help desk confirmed the 9:15pm was indeed an actual flight but it was a sightseeing flight, flying north to give passengers a glimpse of the aurora borealis. Very cool. The reason it is cool is not because of the flight’s destination but what the passengers get out of the journey.

This reminded me of a challenge that an increasing number of pension schemes are facing at the moment. Being closed, pension schemes have a finite window to solve their problems. What this means is that their ability to invest “for the long term” and expect generally rising markets to solve the problem is disappearing.

Put another way, schemes need to get some value from equity markets even if they end up where they started.

Is this possible and how can it be done?

Choose a different asset

The most obvious solution is simply to just find an asset class that does go up when equities go nowhere – it could be argued that bonds fit this bill.

Move in and out of equities

Assuming that equities go up and down on the course to going nowhere, the second is to sell equities after a rally and buy them after a fall – i.e. try to time the markets.

The problem with both of these approaches is that they rely on assumptions – either about the performance of a different asset class (the assumption about the lack of correlation with equities), or they require skill to time the markets.

Equity derivatives

A third way  sits somewhere between the two and is to use equity derivatives. A simplistic way of thinking about derivatives is to think of them as something that lets you do two things at once. In this case, letting you have some exposure to equity market rises whilst having some protection from equity market falls without having to time markets.

So for those schemes that have a closing window of opportunity there is still the possibility of extracting value even if, on the face of it like the last Edinburgh flight last night, markets seem to go nowhere.


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