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UK Railways Pension Scheme takes big strides in risk-factor equities

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RPMI Railpen, manager of the assets of the UK’s £21bn (€28.9bn) Railways Pension Scheme, has taken big strides towards transitioning to smart beta-style strategies, putting 50% of its public equities portfolio into products designed to access risk premia systematically and cost-efficiently.

A dedicated alternative risk premia function, established as part of RPMI’s ‘Investment Transformation Programme’ (ITP), has allocated to low-volatility, value and income equity strategies after a period of research conducted in collaboration with risk analytics and index provider MSCI.

Further research into other risk premia is currently underway, and alternative ‘hedge fund beta’ is on the longer-term agenda.

Steve Artingstall, an investment manager at RPMI Railpen, said: “This project came out of looking at the underlying drivers of risk and return in different asset classes but also at how much we were paying to get exposure to these factors through actively managed strategies.

”Cost is a big part of what we are doing – this is about understanding what the drivers are and then accessing them in the most cost-efficient way.”

He added: “There is still a place for traditional active management in the RPMI portfolio – it’s just that the bar for consideration has been raised substantially.

“If we think we can get 80% of the benefit of something at 20% of the cost, we’d consider that a good outcome, so active managers would need to persuade us that more than 80% of the excess return they generate is not replicable systematically and cheaply.”

RPMI is implementing its strategies via both indexation, with implementation of tracker mandates by Legal & General Investment Management, and active quantitative management methodologies, all of which are open to evolution.

“We are always looking to broaden and deepen exposure if we can identify and design more effective ways of capturing these risk premia,” said Artingstall.  

For example, the Research Affiliates fundamental indexation approach forms one part of RPMI’s value allocation.

However, RPMI subsequently worked with index provider FTSE to build a bespoke, more concentrated version of this strategy and is due to transition assets to the new version soon.

“We use external active managers, such as Unigestion for low-volatility and AQR for risk premia, which might be regarded as active managers but which we regard as simply having a well-designed or more refined approach to accessing the factors we are interested in,” said Artingstall.

“Cost-efficiency remains critical, so there is still a very high bar for the quantitative active managers to clear when there are well-established style indices available.”

Speaking with IPE after presenting at a factor investing conference for institutional investors hosted by MSCI, Artingstall said RPMI was actively researching momentum and quality risk premia.

Areas of further research would include the small cap and illiquidity factors, he added.

“We have already moved to a significant position, with 50% of our public equity exposure managed in this way, and we will consider increasing that depending on the level of conviction we have in other factors we are examining at the moment,” he said.

For the longer-term agenda, RPMI will look into the cost-efficiency and transparency of moving towards long/short implementation of its risk-premia strategies, which have so far been long-only.

It may also take the project beyond its equities portfolio and look into ‘exotic’ or ‘hedge fund’ betas.

Altaf Kassam, head of index applied research for the EMEA at MSCI, told IPE RPMI Railpen’s moves were part of a broader trend in institutional asset management.

“We launched our Minimum Volatility index in May 2008, and, of course, after the market fell in September, everyone rushed into defensive strategies,” he said.

“But then the market rebounded in 2009, and everyone recognised you couldn’t put all of your eggs in one basket, so investors started looking for a more cyclical factor, like value or momentum, to diversify the minimum-volatility.

“Today, what we are seeing is the idea of diversification between multiple factors to manage financial risk, as well as governance or career risk.”

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