PI Partnership – Invesco Investment Solutions


10 year expected returns vs historical 10 year returns 20%


Mark Humphreys is head of EMEA client solutions at Invesco Investment Solutions


15% 10%


ALTERNATIVE INCOME FOR DEFINED BENEFIT PENSIONS – JUST WHAT YOU WERE LOOKING FOR?


While there is generally clarity on a scheme’s long-term objec- tive, there are many ways to get there. Often the journey is assumed to be a steady path, which for closed schemes is typi- cally towards an agreed “low risk” asset allocation of gilts and credit, albeit this may still be many years in the future. However, a journey is more than the destination: there is a risk that growth assets are held for longer than necessary for returns that may never arrive.


Equities can present an uncomfortable risk of capital loss and uncertain income yields, particularly for schemes which are maturing: demand has pushed valuation multiples to high lev- els and disruptions from supply chains, tariffs and inflation, particularly for UK investors, look to be far from transient. We find equities are sometimes retained for historical reasons, and only sold when the funding level reaches certain levels. Meanwhile, investment-grade credit and gilt yields remain low despite the recent rise in interest rates: when funding levels rise, there is a limit to how much of the ultimate ‘low risk’ port- folio can be purchased, as every pound switched reduces expected return and hence increases the value of liabilities (on the technical provisions basis). Based on our Capital Market Assumptions we expect lower returns from public markets in the next 10 years compared to the past 10 years, as government and central bank injections have pushed easy-to-access equity and bond prices to elevated levels. Defined benefit schemes are now on the hunt for new invest- ment opportunities that provide reliable asset growth as well as high and predictable income.


5% 0%


Expected 10y return


Historical 10y return


Source: Invesco; Capital Market Assumptions as of 12/31/2021, Historical returns to 12/31/2021, Private Credit returns refer to direct (unleveraged) returns. Past performance does not predict future returns. There can be no assurance that any estimated returns or projections can be realized, that forward-looking statements will materialize or that actu- al returns or results will not be materially lower than those presented. Data is unhedged GBP. An investment cannot be made into an index. Capital market assumptions are for- ward looking, are not guarantees, and they involve risks, uncertainties, and assumptions. Refer to the important information for additional CMA information. For illustrative purpo- ses only Forecasts are not reliable indicators of future performance.


What is alternative income?


Alternative income refers to any income from non-traditional sources and falls broadly into four categories, (pictured below). The asset class has grown exponentially since the global finan- cial crisis as banks have faced stricter regulation and higher cost of capital to lend customer deposits.


Source: Invesco. For illustrative purposes only.


From theory to practice


While there are many potential benefits of including alterna- tive income within portfolios, the road to implementing private


26 May 2022 portfolio institutional roundtable: Private markets


Cash


>15y Gilts Linkers


Sterling Corporates High Yield Global Equity Hedge Funds


Real Estate Debt (snr) Private Credit (snr) Infrastructure Real Estate


Private Equity


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