KPMG Investment Advisory

Key ideas alert - Quarter 1

 

Emerging Markets – The Investment Case

KPMG Investment Advisory Research View

• We believe there is a strong case for a strategic allocation to emerging markets, driven by their long term growth prospects. .
• Specifically, we believe that a long-term strategic allocation will both enhance risk-adjusted returns and provide an added diversification benefit within a Scheme’s overall portfolio.

What can you do?

• Emerging market exposure can be accessed via a number of different asset classes, such as equity, debt, and private equity, each with a different risk/return profile.
• However, we believe that the most straightforward route for Schemes would be either through an allocation to emerging market equities or local currency denominated debt, which provide exposure to the regions’ higher GDP growth, rising per capita income and favourable demographics with a greater liquidity and less required governance compared to other asset classes.

Click here to download our briefing sheet on Emerging Markets

The Outlook for the Gilt Market

KPMG Investment Advisory Research View

• In order to fund the recent increase in public expenditure the government is expected to launch a gilt issuance program which will see the market double in size over the next 4 years.
• We believe that, as a result, gilt yields are likely to increase in the medium term as supply outweighs demand.
• Although this could mean a decrease in the present value of Scheme liabilities, it could also lead to a period of significantly poor performance from this asset class.

What can you do?

• At this stage it is simply worth being aware of the potential risk that gilt yields do rise, as well as the factors that are currently putting upward pressure on yields.
• In the attached paper we outline these factors, and go on to consider whether any increase in demand is likely to satisfy the increase in supply.
• Each Scheme should consider their individual exposure to any possible rise, and decide whether they are in the position to take on more risk in an effort to minimize the negative impact of any possible rise.

Click here to download our briefing sheet on The Outlook for the Gilt Market

Distressed Debt – Investment Opportunity for Pension Schemes

KPMG Investment Advisory Research View

• A large volume of corporate debt is due to mature over the next 18 months, resulting in a supply that is likely to significantly outweigh demand. In the current credit environment it is increasingly likely that many firms will struggle to refinance this debt.
• We believe that this presents an attractive opportunity for pension schemes to allocate a proportion of their growth portfolio to distressed debt.

What can you do?

• Distressed debt is accessed through specialist managers who have an expertise in investing in fundamentally strong businesses with temporarily weak balance sheets.
• There are two main types of vehicle that pension funds can use to invest, namely single manager direct access funds, which invest directly in distressed businesses, and fund of fund vehicles, which invest in a range of single manager funds.
• A Scheme should consider the different risk/reward characteristics of each investment in deciding which is most appropriate.

Click here to download our briefing sheet on Distressed Debt

Further Information

• Emerging Markets
• The Outlook for the Gilt Market
• Distressed Debt