Interview – TfL Pension Fund
One-shoe-fits-all can’t be the right approach for our sector. That would certainly limit the options and the tools open schemes would have to deliver the returns
needed. So the consultation
should take into account the nature and needs of open schemes and our response to the consultation makes that point.
Why do you have a significant investment in emerging markets? Emerging markets are quite close to my heart due to my connection to India and my years at the World Bank. Putting my preferences aside, it is the trustees who drive these important allocation decisions for the fund.
I have a couple of observations on our approach to emerging markets. First, it is consistent with our view on diversifica- tion as we expect EM countries to have a better long-term growth trajectory than the developed markets and different growth drivers. Second, we have had a consistent policy of over-allocation to emerging markets ver- sus the benchmark for more than 10 years because of our long-term investment focus and belief in these markets. Third, we cast our net widely with an allo- cation to every possible emerging market sleeve. This includes private equity, equi- ties, bonds, infrastructure, real estate and hedge funds. The only thing we haven’t done is private credit and that is not for the lack of trying. Fourth, we have not shied from making bold and innovative moves. We were one of the seed investors in the IFC Emerging Market Fund back in 2014 when infra- structure was not even a mainstream asset class, let alone one focused on EM. I engage with the IFC Asset Mobilisation team to explore investment opportunities in the low-to-medium countries to ad- dress climate change and deliver the Sus- tainable Development Goals more gener- ally. On that theme, last year we made a $50m (£40.1m) commitment to a large greenfield solar platform in Brazil. We
14 | portfolio institutional | June 2023 | Issue 124
invested in renewables in India and China long before many pension funds were investing in their home renewables markets. Of course, there is a perception that these are risky assets, and I’m not denying that. The important point here is to under- stand
that they risk-adjusted returns.
I have two related observations. We are firm believers in active management, as investing in emerging markets cannot be done passively.
The other is that there is a critical link between our sustainability and engage- ment strategy and investments in emerg- ing markets. This is an asset class where our fund sees most value-add from engagement and impact delivery, not just on climate change but on multiple sus- tainability metrics.
What percentage of your entire portfolio is allocated to emerging markets? We are roughly 2% in excess of the bench- mark so about 12% of our equity alloca- tion and around 8% overall. This is tiny compared to their economic footprint of around 60%.
With interest rates rising, are you con- cerned about further sovereign debt defaults?
Emerging markets is just one broad label. Within that label, at one extreme we have countries like South Korea and on the oth- er side of the spectrum we have Mozam- bique, for example. The difference couldn’t be more immense.
This is why it is important that emerging markets are approached with caution and through active management. We have default risks in our fixed income book. You can’t completely avoid them, but it is so important to be with an active manager in emerging markets who understands the economic and political dynamics to avoid the falling knives. Some will offer attractive headline returns but there is a reason for those returns.
offer attractive
Actually, if you look at some of the well- constructed frontier market portfolios, risk-adjusted returns are better, but not having a concentrated position is key. The perception of risk in emerging mar- kets is always greater than the reality with a tendency to extrapolate risks on the back of more idiosyncratic events, be it default by Sri Lanka or Ghana, as an example. The way I see it, this perception premium allows for some attractive risk-adjusted opportunities, if harvested properly.
The fund also has a liability-driven invest- ment strategy. How did that play out last year?
Like many pension schemes, our trustees have had an LDI overlay profile since 2010 with a range of triggers in place. So early last year, our hedge ratio was in sin- gle digits in conjunction with our real rates triggers.
The trustees understood the rates and inflation needed to be hedged but they had to take into account the open-ended nature and long-term focus of our scheme as well as value for money considerations. It made no sense to hedge real rates as low as -4%. So when the LDI crisis hit last year, we were in quite a comfortable liquidity position with a collateral buffer of as much as 800 basis points within the LDI mandate and ample cash liquidity outside at the fund level. Many schemes struggled but overall, our liabilities were down, assets held up well and our funding ratio improved signifi- cantly, so I can only say that we have been a net beneficiary of the LDI crisis and a general uptick in real rates.
Is that also because your cash reserves allowed you to enter the bond markets when some assets became more attrac- tively priced? Absolutely. Things have changed since, in terms of hedging and leverage. Real rates increased significantly, and our trustees took the view that they had become attrac- tive enough to lock in.
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56
