“Only when the tide goes out do you discover who’s been swimming naked,” legendary investor Warren Buffett once said.

While few portfolio managers anticipated the sheer speed and force with which the waters receded during Covid-19 – or the swiftness of their return, the impact of the pandemic made clear that potential risks exist that may not have been seriously appreciated before.

The coronavirus crisis sparked a “huge realisation of how risks in a systemic risk event cascade in unexpected directions”, said Sandy Kaul, New York-based global head of business advisory services at Citi, speaking at the launch of the Official Monetary and Financial Institutions Forum’s (Omfif) Global Public Pensions 2020 report in November.

Jeffrey Jaensubhakij, GIC:
Investor patience is required

As a result, she added, “decomposing something like climate change into a geographic risks or sector risk doesn’t really work because you don’t know what other sectors are going to start to be impacted as part of the cascade”.

The crash also served as a timely reminder that liquidity is never there when you need it most – as an ever-swelling wall of money continues to pour into illiquid assets.

Indeed, these days one must think differently about even supposedly easily tradable markets, argued Jeffrey Jaensubhakij, group chief investment officer of Singapore sovereign wealth fund GIC.

Even with listed assets, it makes sense to take the view that they may need to be held to maturity, he said, speaking at the Greenwich Economic Forum on November 11. “If you’re trying to trade in and out of assets with the expectation that liquidity will be there, I think it’s a more dangerous game than it’s ever been before.

“We’re almost forced, even in publicly traded assets, to take a longer-term view, almost as with private markets... about whether we can hold it for a longer period,” Jaensubhakij said.

LOOKING LONG-TERM

Speaking on the same panel, Alain Carrier, head of international at Toronto-based retirement fund Canada Pension Plan Investment Board, similarly stressed the importance of a long-term view.

Speaking on the same panel, Alain Carrier, head of international at Toronto-based retirement fund Canada Pension Plan Investment Board, similarly stressed the importance of a long-term view. One thing he said CPPIB had learned amid Covid was the importance of stress tests, and how this year’s crisis had vindicated the time his organisation had spent on them since the 2008 financial crisis.

The fund had allowed for potential volatility in different markets and geographies and also assumed it might not be able to receive more capital from the provincial government or from portfolio companies, Carrier said.

Alain Carrier, CPPIB: 
Scenario testing is key

“That, to me, is the positive lesson: that the work was definitely not in vain,” he added. “If anything, we could probably have run a few more scenarios.”

Another lesson taught by the pandemic is that asset classes once seen as being stable and fairly defensive, such as property and infrastructure, have more equity-like risks than previously thought, said Suyi Kim, Asia Pacific head of CPPIB.

“For example, rental income for many real estate investments got frozen, because of rent holidays, and toll fee collections being suspended, or slowed down,” she noted, speaking on a panel at the Milken Institute Asia summit on December 10.

“So, going forward, we may focus more on the business model risks in these real assets, which were previously thought of as just delivering very stable cash flow with a high component of fixed income characteristics,” added Kim.

The all-encompassing impact of the pandemic shook the complacency of societies, businesses and investors alike. As they prepare for the future, sensible institutional investors will not let these hard-earned lessons go to waste. 

This article was adapted from a feature on Covid-19's impact on the investment landscape in Asia and lessons learned from it, which originally appeared in the Winter 2020/21 edition of AsianInvestor magazine.