We have a long experience of delivering significant excess returns for clients over the investment cycle. We have learned, through our experience, the things that really matter in delivering success and have organised our business to achieve them. The starting point is understanding that risk is about a permanent capital loss.
From this starting point, we can understand that diversification and hedging are important to success. While important, diversification and hedging alone are not enough and certainly not worth paying substantial fees for. There are four things that matter: rotating between different markets and segments; being positioned to evaluate new ideas early; understanding what matters in using investment managers; and being intelligent and opportunistic when hedging.
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Rotation is critical both as a means of adding value and avoiding permanent capital loss. This is consistent with your competitive advantage: the ability to sit and wait. We need to understand the drivers of return and the economic backdrop, and move our money between different markets in order to generate returns.
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Evaluating new ideas early is key. We need to invest in attractive emerging areas before the broad market follows. The latter is the reason markets will tend to move. Our reputation for innovation means we are generally among the first people those individuals with new investment ideas will meet. Investment in TALF-backed funds and emerging market property are both examples of new ideas we have seeded early.
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Understanding the drivers of investment manager performance is the next link. It is not just about knowing who is “good” but, more importantly, it is about understanding what types of strategy perform well in what circumstances. This is actually more important than finding a good manager. For example, knowing that particular hedge fund strategies tend to outperform as market volatility rises is a bigger driver to successful hedge fund investing, if we time it right, than finding a good hedge fund manager over the long term.
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Finally, as with most markets, those for interest rate and inflation derivatives offer opportunities to add value. Seizing these opportunities intelligently as a co-ordinated part of the overall portfolio management process is a source of value ignored or unseen by most.
Understanding these issues has allowed us to organise our processes to focus on them, with our research effort focused on identifying themes and how they affect specific investments. This is co-ordinated and brought together by our six-person Investment Committee, which draws on our team of 125+ in four locations.
Key Elements
| Diversification |
Wide range of investments in one portfolio. We currently run a portfolio of 25 funds under 18 managers across 6 asset classes. |
| Active liability volatility management |
The ability to design hedging strategies and react to rapidly change derivatives markets without decision delay. |
| Rotation |
We take a progressive approach to significant rotation among asset classes. Most Trustee bodies cannot respond quickly to investment opportunities in a way that means they can capture the maximum value available. |
| New ideas |
Increased ability to consider and access new investment ideas in a timely manner. |
| Investment manager selection |
We use third-party managers when two conditions are met: the strategy adopted by the manager is consistent with our view and how we seek to make the investment; and the manager satisfies our criteria for selection and we believe them to manage assets skilfully. We are not tied to a set of in-house managers. |
| Strong governance position |
By running and monitoring these assets in a single portfolio, we can simplify and strengthen the governance position of these assets. |
Our ability to deliver performance as a result of these key elements is demonstrated by our track record which has been very strong over the long run.