If you read my colleague, Ben Clissold’s, post earlier this month, you will know that we have all been working very hard to deal with the fallout from the pandemic which hit the market last March. But in fact the efforts to build up our liability matching capability – our protection against future risks, started before then. We recognised the need to balance our portfolio so as to be better able to withstand scenarios which resulted in in rising inflation, thus supporting our ability to pay pensions as they fall due.
As well as the work in Fixed Income, we made a number of strategic moves within the portfolio more generally. We increased our overall exposure to liability matching assets while maintaining a diversified exposure across different types of defensive investments, across various geographies. For example, we continued to hold a large proportion of assets in US Treasury Inflation-Protected Securities (TIPS), which was one of the best performing asset classes in 2020. As credit spreads widened after the Covid-19 shock, we increased our allocation to investment grade credit assets – long-term bonds issued by high quality companies. These assets not only provide liability matching characteristics, but also enabled us to lock in a meaningful return pick-up above gilts.
Meanwhile, in equities we maintained our overall exposure, adjusting it dynamically to take advantage of favourable market conditions, while reducing the size of our home (UK) bias, in order to improve geographical and sector diversification. This decision was a substantial contributor to investment performance, as UK equities have been one of the worst performing markets in 2020 and underperformed US stocks by around 30%. Additionally, towards the end of the year we made a standalone allocation to Chinese equities, a growing segment of the equity universe.
Overall, asset allocation decisions taken between September 2019 and December 2020 added around 2.2% to the performance of the DB fund. To put that into context, this is equivalent to adding about £1.6bn to the value of our assets compared to where they would have been had we remained with the strategy we had in 2019. The positive impact came both from decisions taken before the pandemic to protect the portfolio from adverse shocks, as well as from decisions taken afterwards to take advantage of opportunities. In fact, if we isolate decisions taken since March 2020, (when markets fell to their lowest point) we still added 1% (or £750m) to the performance of the portfolio.
But while the immediate and volatile effects of the pandemic may have been and largely gone, we will continue to manage a well-diversified portfolio. This is because, as a long-term investor which exists to pay pensions, we need to continuously think about how we will be able to meet these obligations for years to come.
In my role as Head of the Investment Strategy & Advice, it is my and my team’s responsibility to scan the horizon and model possible outcomes. While no science is perfect, and clearly the past cannot be any certain judge of the future, we are constantly evolving not only to be able to take advantage of market opportunities as we see them, but also to protect ourselves against risks as they emerge.
Nothing in this article should be construed as an offer, invitation or general solicitation to buy or sell any investments or securities, provide investment advice or to engage in any other transaction or service.