Interview – The People’s Pension
out the balance between us building a team in-house, how long it takes to do that, the activity we need to do before that and obviously the potential for additional costs. If you catch the wrong point in the cycle there you could just be adding costs without delivering returns and, to put it slightly tongue in cheek, then you are just an active manager. So, we have to evolve at the right pace, with the right principles. But we think that if you are an institution who understands yourself and you have strong beliefs, then by expressing them in your portfolios, you should get a critical advantage over your passive player on that basis.
Has your rapid growth led to changes in the type of assets you are investing in? Yes. We have some listed infrastructure in a multi-asset ETF. For property, we invest through a global REIT [real estate invest- ment trust] index. We see those holdings as the future of where we would like to get to in more direct holdings, but that is beyond our complexity to deliver value from right now. We have to recognise that due to auto-en- rolment we serve a community of 90,000 employers in our scheme and there are a lot of administration costs that go with that. We do not have a huge investment budget compared to a defined benefit scheme and we have to include all of our costs in our charges. Obviously, that is important for investment decisions, we are not a net-return budgeter. We have to understand the full cost chain and that prevents us at this point from going directly into property or infrastructure until we get more scale. We see those listed holdings as place holders. We know that we would like to do more but we need to have the scale and the right approach with the manager to make sure they understand it cannot be a two and 20 model when we would get into venture capital and private equity. That is not appropriate for our members. We are not sure if that is appropriate for
16 | portfolio institutional November 2020 | issue 98
any kind of member and we cannot hide it so we just will not accept those kind of fee deals. For investments in property or private equity, we will also have to solve the valu- ation problem and make sure we are not giving away all profits to someone who has only been a member for a day while a person who suffered the past 10 years of costs retired yesterday. We need to make sure that valuation mechanisms are equi- table between our members.
Let’s talk about risk management. You described your approach earlier as sys- tematic. What does that mean in the con- text of the rapidly falling markets we saw earlier this year?
A lot of what we do on risk management is to think through problems in advance. We have re-balancing tolerances around our asset allocation. The consideration then becomes do you let the autopilot car- ry on or do you intervene?
A moment where we had to pause was when we came close to the asset alloca- tion tolerances and sold bonds and bought equities on around March 20. We sat there, looked at our numbers and en- gaged with our managers about liquidity in the bond market and asked ourselves if there a reason why we would not allow this to happen? We came to the conclu- sion that this is why we put these rebal- ancing tolerances in place to begin with. We felt
it was an appropriate decision
when we set the asset allocation up and following that through felt like the right decision.
The FTSE100 was at 5,000 points back then and is now at around 6,000 so mem- bers have benefited from that re-balanc- ing. About £300m was transferred into the market which felt like a big moment for us. That was a case of the risk manage- ment in advance doing its job. Back in March, everything was happening. So, having the ability to go back to that blue- print and ask ourselves’ if it remained true was important.
Where we considered more strongly tak- ing a different option was the sterling hedge, where a lot of things came together. Until various central bankers and the treasury had spoken, it was not clear if the UK would have a worse outcome than other nations. So, we kicked the tyres a bit more strongly on our original currency hedging hypothesis. Essentially, you try and do two things. First assess whether this is a risk that is being rewarded, and we believe that cur- rency risk is in the long run an unrewarded risk so you should just hedge it. Then there is an efficiency point. We hedge 70% of our portfolio. But if you think that there is a special insight you have where the market is way off and in theory you could be braver because there was reward in doing something differently. So as ster- ling went down to 1.12 against the dollar, that was quite far off the long-term valua- tions we were hearing from managers and we were seeing negative cash-flows coming out. That helped us endorse the long-term position of taking what felt like a loss and then making sure we were cap- turing some of the gains. But if it had kept making a loss, that would have been a dif- ferent case study to explore.
The long-term trajectory of the pound, say over 10 years, is difficult to predict. Governments around the world have printed an unprecedented amount of money. Is this a competitive devaluation world? Is this a world where the country that does the least printing suddenly has an appreciation in their currency? Will it be tied into the dollar losing its exorbitant privilege of being the world’s
global
reserve currency? Does Brexit matter in terms of the trade deficit? There are a lot of things you could draw into a 10-year prognosis. You can tie yourselves in knots over these pieces of information, but we do not have the skills and expertise to do that work in-house. We do not think this work is more important than asset allocation or
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