The past few months have made interesting reading for all of us in the UK. In this edition of Investment Update we explain our investment position since the vote to leave the EU.
Since the last Update, TPT Retirement Solutions' investment team has been further strengthened by appointing Emmanuel Bocquet as Portfolio Strategist and John Steel as Investment Operations Manager.
Emmanuel leads the strategic management of our investment portfolios. He has over 20 years' experience in investments and was most recently at the investment management arm of the National Grid UK Pension Scheme.
John has over 24 years' experience in the industry and is responsible for leading investment operations while managing TPT's outsourced support services. John's role ensures that TPT's investments continue to meet industry best practice.
Investment Strategy Review
Over the past five years we have diversified our sources of returns away from equities. Moving into alternative investments, such as infrastructure and insurance-lined securities and adopting a more liability driven approach to investing. Making these changes have been beneficial, however, having reviewed the investment opportunities available today we think that there is more we can do to secure more stable funding improvements for our DB schemes.
Having extensively reviewed the opportunities available, we intend to further reduce our reliance on (volatile) equity markets and to extend the reach of our LDI approach. We expect that this will result in a similar level of investment return but, crucially, with a significantly reduced funding level volatility.
How Our DB Assets Performed
In aggregate our DB assets have performed well. More recently we are pleased that our LDI assets and illiquid assets - notably property - have performed well helping us to deliver strong returns. Our Market Outlook provides further analysis.
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 DC Assets Performed
The table below shows the performance of a selected range of TDFs.
*Since 28 February 2013
Markets achieved strong gains in the second quarter despite the shock of the Brexit vote on 23 June. Government bonds with longer maturities performed well. The performance of overseas equities was boosted by the strength of foreign currencies against Sterling after the vote. As a result all funds have 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.
Tailoring the Strategy for DC Investments
Following the 'Freedom and Choice' at retirement legislation that came into effect in April 2015, means that members with DC retirement funds now have more choices available to them as they approach retirement.
It's now almost 18 months since that legislation came in and earlier this year TPT asked our older DC members about their retirement plans. This helps us with a good understanding of what members are doing with their pots and has meant that we've tailored our target date funds, to better align to the needs of our members as they reach retirement.
The UK referendum vote to leave the EU has been centre stage of late. Whilst the outcome was a shock to many market participants the impact on most of our investments was positive and both our DC and DB investment returns for the last year back this up.
However, as most of you with DB pension schemes will know, the valuation of assets should not be viewed without reference to the liabilities and unfortunately liability values have risen sharply since the vote. The reason for this is that the yield (or "return") on government bonds with long (10 + years) maturity dates has fallen substantially as the probability that the Bank of England will raise interest rates substantially in the future has declined (in the short term we have even seen a small interest rate cut). Falling yields put upward pressure on liability values.
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) is proving particularly beneficial at this time and has helped us to deliver strong DB returns.
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 in the aftermath of the Brexit vote.
Incorporating ESG Factors into Investment Decision Making
TPT is a long-term investor, with pension liabilities stretching out many years ahead. As such, TPT recognises the importance of considering long-term risks, such as Environmental, Social and Governance (ESG) risks when setting its investment strategy and selecting its investment managers.
At TPT we signed up to the Principles for Responsible Investment
in 2010 and have been evolving our approach to Responsible Investment ever since.
As part of our work managing investments, we aim to apply our underlying policies on Responsible Investment to all asset classes and strategies that we invest in. That means we try to incorporate ESG information into our investment decision making process. We think of this as an additional lens through which to look at investment opportunities and we believe it can ultimately help to identify better risk-adjusted returns.
When it comes to climate change, the UN Conference on Climate Change in Paris last year certainly helped to focus investors' minds on the risks and opportunities that more stringent environmental regulations might have on portfolio returns. This momentum has only grown over the recent months, with the USA and China ratifying the Paris agreement.
In May 2016 ,our Investment Committee was presented with an analysis showing the potential impact on the portfolio's returns under certain climate change scenarios. This analysis is now increasingly being fed into our Long-term investment strategy as well as our stewardship activities.
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