Welcome to the October 2017 edition of our Investment Update, an opportunity to share our latest performance figures and investment news. You will see from the commentary that the investment strategy has continued to deliver strong returns. In order to manage volatility and cognisant of current equity market valuations, TPT’s investment strategy for the growth portfolio is to continue diversifying the portfolio away from equities by sourcing suitable alternative investments.
During the last quarter, we have been focused on finding opportunities to increase our exposure to infrastructure, an asset class with which we are already familiar, as well as looking at new strategies to deliver stable low volatility returns. We have recently completed due diligence on two investment managers running infrastructure strategies. We think these will be complimentary to the existing infrastructure portfolio and will also fit well with the priorities highlighted in TPT's Climate Change Report
In the coming months, we will turn our focus to due diligence on new strategies (regulatory capital and alternative risk premia). We are pleased with these strategies as they provide further diversification of returns that have low correlation with equities. We will be providing employers with further information on the appointment of new investment managers in due course.
There have also been some other important changes to note during the last quarter. I am pleased to announce that the investment team has been expanding and we have recruited two new individuals to the team, an intern and an analyst. We are now eleven people strong and to accommodate the bigger team, we have moved to new offices - still located in central London, with the advantage of being close to the investment managers we use to help implement our investment strategy.
We have also recently completed a review of our investment consultants. After having a relationship with Mercer for many years, the Investment Committee were impressed with the services presented by Redington during a series of in-depth interviews and we are pleased to announce that Redington will now act as TPT’s primary investment consultant.
We believe these changes will help us to deliver a high quality investment service for all of our schemes and underlying members.
I hope you enjoy this edition of Investment Update and if you have any thoughts on what you’d like to see in future edition, then please get in touch.
CIO, TPT Retirement Solutions
Consultation under the Pensions Act: Statement of Investment Principles (SIP)
Under the Pensions Act 1995 the Trustee of TPT is required to have a written SIP. The SIP governs investment decisions for TPT, and is required to be amended before any significant changes to the investment arrangements of TPT are implemented.
The Trustee has a statutory duty to consult all participating scheme employers before any material amendment is made to the SIP. We are seeking consultation with Employers as a considerable period has elapsed since the previous consultation. Please note the changes below are consistent with the evolution of best practice and do not necessarily represent material changes.
This email explains the proposed changes to the SIP.
• Section 4 notes that the main decision for Defined Benefit schemes is the mix between Liability Focused and Growth assets and provides more detail on how the latter are managed.
• Section 5 details the funds available for Defined Contribution assets, including ‘target date’, ‘ethical’ and ‘self-select’ funds, and section 7.2 specifies the Trustee’s relationship with their provider.
• Section 7.3 lists the main risks faced by the Trustee in managing the investments and how they are mitigated.
• Section 8 updates the Trustee’s responsible investment, climate change and voting and engagement policies.
How our defined benefit assets performed
Overall, TPT achieved strong asset returns over both a one year and five year period. As outlined 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 growth assets classes.
In the last year, liability values have risen by 5.5% as gilt yields remain low. Our Liability Focussed Assets are designed to track liability values (and, therefore, limit funding level volatility) and these have kept pace, returning 7.0% over one year, thereby helping to mitigate the impact of these rising liabilities on scheme funding levels.
*Shown as an approximate return on average scheme liabilities
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 (annualised)
All vintages of TDFs beyond 2026-2028 recorded positive performance in the quarter. All funds have continued to achieve 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.
Valuations of global equity markets remain high, particular in the US and the Eurozone, despite some minor falls reflecting mounting tensions between the United States and North Korea, and worries about the potential impact of recent extreme weather events on the US economy.
Despite market expectations of a Bank of England rate rise, UK bond yields continue to remain low, with current yield curves only implying a modest rise in long-term rates over the next few years. On the back of the devastation caused by the hurricanes, ten year US Treasury yields fell for the first time since last November.
Given the low rate environment, we continue to believe that schemes should protect their funding levels from changes in long-dated government bond yields and we have been transitioning assets out of gilts into LDI funds on a Scheme by Scheme basis to help raise protection levels. We have also put in place a synthetic equity strategy, this allows capital to be released from equities and re-allocated whilst still retaining ‘synthetic’ equity exposure. The released capital means we are able to increase protection further.
As patient long-term investors, we seek to structure our investments so that they are sufficiently robust to weather 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.