Investment Update - March 2017

Welcome to our March edition of Investment Update,
our opportunity to share our latest performance figures and investment news. 

You’ll see in our performance figures that most asset classes have been very strong over the last year. However, this increase in assets has been offset by rising liability for our defined benefit pension schemes. So, in turn this means that the task of improving scheme funding levels continues to be a challenge. This is a challenge that my team and I are working on, with board members, the Investment Committee and our investment managers.  
To help us to meet this challenge I am delighted to say that we are in the process of setting up all Schemes on a platform called SkyVal. This system will allow us to access more up to date information on Scheme progress and I look forward to sharing the output from that with you later this year.
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

How our defined benefit assets performed 

Across the board we have seen strong asset returns over both one year and five year periods and overall we are pleased with the performance of our assets. On the growth asset side, it is clear that equity performance has been the main driver (see market outlook section) but even more significantly in recent times have been the returns generated from our defensive assets.  In a year when the average pension scheme has seen their liabilities increase by 29% (see the Benchmark for Liability Focused Assets in the table below) our Liability Focused Assets have returned 48.2% helping to mitigate the impact. 

Table 001
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 (TDFs).

Table 002
*Since 28 February 2013

Equities continued to rise in the last quarter of 2016 and the strength of foreign currencies against Sterling enhanced returns from overseas markets. Gilts (UK government bonds) fell back as expectations of higher interest rates increased, but short dated index-linked gilts gained on forecasts of rising inflation. All vintages of TDFs recorded positive performance in the quarter. They have sustained 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. 

Market Outlook 

Political events continue to take centre stage whilst most economic forecasts continue to point towards steady GDP growth and inflation returning to close to the Bank of England target range. Despite the warnings of potential risks to the economy (most notably political risk) the markets are responding positively to the predictions of steady GDP growth and with the continued supply of “cheap” money, growth assets continue to perform strongly in this environment.
Whilst we are not predicting an imminent equity market sell off, we do think a correction in equity markets is a realistic possibility and we are therefore putting in place some protection to reduce our exposure to equity markets. With one eye on our plans to strategically reduce our exposure to equities in favour of alternative sources of return, the time is right to protect some of the recent equity gains.
The valuation of pension liabilities are linked to UK bond yields and liability values have risen sharply in the year to the 31 December 2016 as the yield  on government bonds with long (10+ years) maturity dates has fallen substantially (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 changed 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.

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