Investment Update - December 2016

Welcome to our latest edition of Investment Update. As the new Chief Investment Officer (CIO) of TPT Retirement Solutions, I’m keen to share the news from our Investment Team.

I joined TPT in November and am responsible for driving TPT’s Investment strategy and leading the Investment team, as a member of TPT’s Senior Management Team. I’m excited to be joining TPT at a time where we have won a number of industry awards, and published our most recent report on climate-related disclosure.

I’d also like to thank all of you who have responded to our Investment strategy review, work is already underway and we will keep you posted with progress.

I hope you enjoy this edition of Investment Update and if you have any thoughts on what you’d like to see in future editions, please get in touch.

Cliff Speed

CIO, TPT Retirement Solutions

TPT wins award for climate related disclosure

We’re proud to be committed to responsible investment. ‘Responsible’ investors endeavour to take environmental, social and governance (ESG) factors into account in their investment decisions. We believe that ESG factors can have an impact on financial performance, so by incorporating this information into our investment decisions we aim to reduce risk and enhance long-term returns.

In October 2016, we were delighted that TPT’s work on ESG were recognised at the International Awards for best Investor Disclosure of Climate Related Risk. The 2° Invest Award was collected by Jennifer Anderson, TPT’s lead for Responsible Investment and ESG.

TPT is leading the way for pension funds by trialling tools to assess the impact on portfolio returns from climate change regulation and the transition to a low carbon economy. TPT has been working with our investment consultant, asset managers and other specialist advisors to understand the impacts of this risk.

We shared our findings from this work to promote transparency and support the development of best practice within the industry. A copy of the climate related disclosure report can be found here and for more information on our approach to Responsible Investment and visit our website.

How our defined benefit assets performed

Investment returns have been strong of late and we finish our financial year end with a return in excess of 26%. Whilst this must be viewed with reference to liability values which have increased (as gilt yields have fallen) the investment performance is important for funding levels when liability valuations are causing such a strain. Our Market Outlook provides further analysis.

DB performance table

We actively monitor the performance of our assets as well as the performance of the underlying managers. This enables us to understand the underlying factors driving performance (looking at a micro manager level) as well as to measure how the strategy is performing as a whole and whether each investment manager is delivering on its objective.

How our defined contribution assets performed

The table below shows the performance of a selected range of Target Date Funds (TDFs).

DC Performance table
*Since 28 February 2013

All asset classes used in the DC funds appreciated in the third quarter. Developed and emerging markets equities continued to advance, with returns in Sterling from foreign markets boosted by the weakness of the Pound which depreciated against all main currencies. UK government bonds (Gilts) also advanced. As a result all funds have substantially exceeded their benchmarks over 12 months and have continued to show outperformance since inception in February 2013.

These benchmarks are the Consumer Price Index plus a percentage. For the longest dated fund this is CPI + 4% p.a.

Of course, past performance is no guarantee of future returns. The value of a fund may fall as well as rise, depending on market conditions.

Market Outlook

Political events continue to take centre stage. Whilst the UK has been digesting the implications of the referendum vote to leave the EU (and may well be for some time to come) the US election has drawn the attention of a global audience with most media coverage anticipating that a Trump victory would create market volatility. In reality, investments have ridden the political turbulence and we find most growth-seeking assets like equities up relative to before these two events. 

Probably the most significant change in market conditions in the last few months has been the rise in UK government bond yields. As DB pension schemes’ the valuation of pension liabilities are linked to UK bond yields and liability values have risen sharply in the year to the 30 September 2016 as the yield  on government bonds with long (10+ years) maturity dates has fallen substantially (falling yields put upward pressure on liability values). However, from a UK pensions perspective, the US election result has heralded a rise in yields as an expansionary (and inflationary) policy by the Trump administration is anticipated. Closer to home, the short-term concerns over the referendum vote seem to have dissipated and the Bank of England is increasingly expected to begin raising interest rates in the coming months. 

The fact that we have been increasing the amount of liability risk we hedge in recent years (through what's called liability driven investment or LDI) has helped us to dampen the impact on funding positions.

As patient long-term investors, we seek to structure our investments so that they are sufficiently robust to weather most storms and it is pleasing that our investments have performed well through recent political events.

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