Chetan Ghosh | Interview


the returns on ground rents, for example, are all very much part and parcel of our CDI strategy.


What do you make of the industry’s shift from momentum into value stocks in September? UK pension schemes by and large have not segmented their portfolios by value and growth; it is more something US investors might do. We have been conscious for quite a few years now that there has been this growing divide between the fortunes of value and growth stocks, but value contin- ued to underperform. We have seen a cou- ple of bounces, but overall value continued to underperform. We cannot time markets. Trying to make decisions about the relative merits of value and growth is even harder and we have lit- tle competitive advantage in doing that so we would not structure [for that] on a short- term basis.


As a pension scheme you need to think about where you have the competitive advantage and stick to it. Are we going to be the world leader in calling value versus growth? No. Are we going to be able to take advan- tage of our long-term horizon to buy some good quality long- dated contractual income assets that many other investors can’t touch? We are capable of doing that so let’s just focus on those areas. That is important to how we approach our overall investment strategy.


How much of your equity portfolio is actively managed? About two-thirds.


Does the recent change highlight some of the pitfalls of factor-based investing? That might be an interesting option to explore; we can see that factor investing is creating mini bubbles in certain pockets of the equity markets. As a general invest- ment principle, we just do not want to go into spaces that are poorly priced. If all investors would stick to this principle, then they could avoid a lot of problems.


You are holding quite a lot of cash, more than £100m according to your latest annual report. What are you planning to do with it?


That is predicated on the view that a lot of asset classes have become extremely expensive. At this point in time we just want to bank a little of our 10-year windfall and create some dry powder so we can invest with the best risk-adjusted return opportunities. But it is not a long-term strate- gic position.


A pension scheme with a utility as a side business


During the past five years, Centrica’s price in London has plunged from 292.7p a share to 69.7p, resulting in speculation over the summer that it might be booted out of the FTSE100. This meant that the market cap shrank dramatically to more than £4bn by the end of October, compared to £12bn five years ago. Throughout the same period, the group’s DB assets grew steadily to £9.5bn, turning Centrica into a pension scheme with a util- ity company as a side business.


It is not typical in the UK. A lot of the consultant advice is to stay fully invested because you cannot time markets. We do not disagree with the gen- eral principle but when we have earned enough money and we are nervous about


Yes, a lot of people are pigeon-holed by this but for us it is worth taking a step back knowing that the LDI assets are there. You might see your asset base becoming a lot more volatile as a result of having those place.


further If we did not have


deficit contributions coming in, we would still be cash- flow negative.


the risks associated with current pricing, to us it feels like good risk management. This feels like good risk management rather than a tactical activity.


Could those opportunities come sooner than you think? Absolutely. Within wind and solar, for example, a lot of these opportunities are equity market independent. At the same time, while I cannot disclose the numbers, the reality is that as gilt yields have fallen, liabilities have increased so a big part of the challenge is dealing with our rising deficit.


Are the measurements of DB pension lia- bilities reflecting a lot of the volatility we are seeing at the moment?


In October, pension schemes started disclosing their ESG policies as part of their State- ment of Investment Principles. How big of an impact has it had on your scheme?


I do not think there is a pension scheme in the land that did not need to make changes to their statement of invest- ment principles. But it is also worth keeping in mind that pension schemes have had to have state- ments on that since 2007.


The most obvious change now is that the regulator is asking us to become much more explicit about the impact of climate change on our portfolio. It is one thing to update a regulatory compliance document; it is an entirely different story if that leads to changes in behaviour. I suspect the actual change of behaviour will take much longer. I don’t think that is because a lack of willing but because of a lack of time and budget, given that there are now so many things on trustees’ agendas.


Issue 88 | November 2019 | portfolio institutional | 19 tips in


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