The People’s Pension – Interview


have an adaptive cap portfolio where we essentially equal-weight to the mega-cap stocks from a market cap portfolio and invest the proceeds in smaller cap stocks. So, we have some reasonably substantial deviations from market capitalisation and most people wouldn’t see that as pure passive. We see passive as one tool and do not think that anyone should just dive in there. Markets are clearly not efficient, but that is not to say that we have the secret source or the understanding of how to beat them.


September the fixed income fund outper- formed a strongly performing equity fund. It is a crazy world. The first quarter was painful, but it was also more of a return to a textbook investing environ- ment than we have seen for a while. We aged a lot in March and into April, but it reminded us about getting back to the investment thesis.


Over the past 10 years, passive funds have done well, whereas active funds have struggled to outperform. You predominant- ly invest in passive equities, so how will you fare in this new, volatile environment? You have to remember that we are a grow- ing fund. Our average member is far from retirement. Volatility for a 30-year-old means cheap assets in the long-run so the sell-off in equities in the context of their lifetime savings journey is not the worst thing ever. If we were a defined benefit scheme with a de-risking plan in place and saw our liability hedge suddenly rise, that could be dramatically more painful. We transition over 15 years to fixed income


from equities for members who are close to retirement. That journey worked well. People closer to retirement, certainly those at retirement, didn’t suffer losses during that period. If your retirement is five to 10 years away then there is time to recoup any losses, but these were quite minor. Volatility in general can mean cheap as- sets and we have got fantastic pound cost averaging from members frequently con- tributing to the portfolio over the period. On the broader question of active versus passive, it is still difficult to be an active manager in this market. I would not frame us as being a passive investor. Mar- ket cap is the lowest cost and simplest route to access a market but is not always the best. We have to justify the relatively substantial deviations that we make away from that. We have a multi-factor portfo- lio for about 20% for the portfolio. That is our most aggressive fund in terms of deviating from the market cap index, the holding is a bit less in the default fund which is around 15% to 16%. Then we


The longer your time horizon, the more obvious certain trends could become, the more conviction you could have in them and the more competitive advantage you might be able to get from them. Take cli- mate change. If we look to 2030 or 2050, will there be more carbon dioxide burnt by the economy or less? The answer is rel- atively obvious so we believe you could deliver a bit more value by tilting away from fossil fuels. Then it becomes a pro- cess of deciding how you do that, which is broadly where we are at this point.


So, investing in passive funds would not mean blindly following the market capitali- sation of indices? We do not see ourselves as passive inves- tors, we call it systematic investing. There are passive investors who blindly follow market capitalisation-based indices. They may well engage with their managers who manage those assets to ask them to exclude the lowest ESG scoring compa- nies or engage with them. We do these things, but we do not leave it there. As an institutional investor who has a good sense of institutional values, understands its role in the value chain and can build an in-house resource which can kick the tyres of managers and the data, we think all of these activities will add value over the long term. We are on a journey. We started our con- versation with the fact that our assets dou- bled in the past two years. We have to plot


Issue 98 | November 2020 | portfolio institutional | 15


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