TfL Pension Fund – Interview
Within private markets, about 9% of our fund is committed in infrastructure, 5% in real estate, 11% in private equity and nearly 5% in private credit. In the majority of cases, we are at or near our target allocation, but we are continuing to scale up these strategic asset allocation targets. This is driven by our search for diversifi- cation, downside protection and desire to clip illiquidity premium in private markets. We are a defined benefit scheme, but are still open and overall cashflow positive, so we can afford to take the long-term view required to invest in private markets. Every alternative asset class is different and is there for a good reason in our port- folio. Assets like infrastructure are return-seeking, liability-matching invest- ments. Private credit – investment grade and sub-investment grade – complements our public bond allocation.
As a pension fund, you must be aware of home bias, as I noted before. The UK’s share of the MSCI World has fallen dur- ing the past 10 years to about 4%. It has gone up slightly in the past 12 months but only marginally, so our allocation to the UK is in line with the benchmark. Most of this is in actively managed man- dates. We are not telling managers which market to choose. If they feel that the UK offers good options, they will allocate cap- ital. That has always been the case. If I look at our value managers, they are over- allocated to the UK versus other markets and we have benefited from that. What I am not suggesting is that as a UK pension fund, we are having an overt tilt towards the UK. Home bias should al- ways be on our minds and an allocation should be a function of opportunities based on the risks and returns the mar- kets offer. At one stage, the UK was quite
attractive on a valuation basis, but our trustees are not looking to over-allocate to the UK just because we are a UK pension fund. We also must be aware of Transport for London’s covenant risk with its high UK/ London economic dependency. From a funding perspective, my trustees are quite mindful of diversifying against this risk as much as any other.
What alternative asset classes is the fund focused on? TfL Pension Fund has one of the largest allocations to alternatives among our peers at about 40%. Private markets are around 28% and liquid alternatives – which are primarily hedge funds and low- cost absolute return strategies – are around 12%. Within those two broad cate- gories, we are invested in almost every segment of the market.
Our hedge fund portfolio is probably the most interesting and unique in our peer group, many of whom have exited this asset class. Our portfolio has a low corre- lation to equities, rates and credit. It is there purely to diversify the classic mar- ket risks, of which we had all in plenty last year. Depending upon which mar- kets you held, your assets could be down by as much as 20% to 25% last year but our fund was flat for and I have our hedge fund portfolio to thank for that, while some funds returned as much as 50%. That showed the value of diversification. We have never held highly levered long- short equity managers. Instead, the focus of allocation has been on risk-controlled macro, commodities and trend strategies that benefited from volatility last year.
Should the DB Funding Code consultation result in a greater distinction between the investment strategies of open and closed schemes?
There must be a distinction between open and closed schemes. Our needs are differ- ent from those of a closed scheme.
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