Welcome to our June edition of Investment Update,
our opportunity to share our latest performance figures and investment news.
We publish this update almost a year after Brexit and just a day before the UK goes back to the polls in a snap general election. As you will be aware, election outcomes have been creating an environment of uncertainty for many of our European neighbours, not least in the recent French Presidential race. We now await the results of the UK election, with an eye on other elections to come later in 2017, in both Germany and Austria, and the impact that this might have on financial markets.
Geopolitical uncertainty doesn’t look set to abate any time soon, but as long-term investors seeking to protect the value of our members’ savings it is important that we remain focussed on implementing our long-term investment strategy. In the last quarter we have therefore continued our focus on implementing de-risking strategies that help reduce volatility and protect investment returns in the portfolio.
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.
CIO, TPT Retirement Solutions
How our defined benefit assets performed
Overall TPT achieved strong asset returns over both a one year and five year period. As we discuss in the market outlook section, the key contribution for growth assets has largely been driven by equities, but we are also pleased with the overall performance of many of our alternative assets classes. In the last year liability values have risen by 22.7% as gilt yields remain low. Our Liability Focussed Assets are designed to track liability values (and therefore limit funding level volatility) and these have more than kept pace, returning an impressive 37.3% over one year, thereby helping to mitigate the impact of these rising liabilities on scheme funding levels.
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 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.
*Since 28 February 2013
Economic growth and inflation data confirmed the global reflation theme in Q1 2017, leading to equity markets moving higher. In Sterling terms emerging markets and developed Asia ex Japan rose over 10% and Europe gained 7.5%. Emerging markets benefited from firmer currencies. Bond markets were more circumspect in the face of political headwinds and uncertainties about the timing of interest rate increases. (In the US the Fed increased rates in March, as widely expected). Nevertheless, Gilts, both fixed interest and index-linked, gained, as did global corporate bonds in sterling terms. The Pound was stable against both Euro and the Dollar.
All vintages of TDFs recorded positive performance in the quarter. They continue to sustain substantial outperformance against their benchmarks over both 12 months and since inception.
These benchmarks are the Consumer Price Index plus a percentage. For the longest dated fund this is CPI + 4% p.a.
Since our last investment update political drama has not been in short supply. In April, Theresa May, announced a snap UK general election and in May, French voters defied populist momentum in Europe by electing Macron as their new President. In the US, Trump’s Presidency survived its first 100 days, but continues to face headwinds on a number of fronts. Despite the uncertainty created by the geo-political environment, global equity markets, in particular the US and Eurozone, have continued their march forward, with valuation measures now reaching levels not seen since the beginning of 2007.
As you may recall from our previous updates, TPT’s investment strategy is to continue strategically reducing our exposure to equities in favour of alternative sources of return. Whilst we are not predicting an imminent equity market sell off, we do want to protect the significant gains that our equity portfolio has achieved over the past 5 years. We have therefore implemented an equity protection strategy to protect the value of the equity portfolio, some of which will be re-allocated to alternative asset classes over the next 12-18 months.
The valuation of pension liabilities are also linked to UK bond yields and liability values have risen sharply as the yield on government bonds with long (10+ years) maturity dates continues to remain low (falling yields put upward pressure on liability values). Whilst we expect the Bank of England to raise its base rate we do not hold a strong view on whether the rise will be either more or less significant than is currently priced into the market. We therefore continue to hold the view that Schemes should seek to protect their funding levels from changes in long-dated government bond yields.
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 and at a time when liability values have been rising significantly.