What is your current thinking on equity investment?
Dyfed Pension Fund
Treasury and pension investment manager
• Location: Carmarthen
• Assets: £1.6bn (€1.9bn)
• Membership: 39,645, (17,596 active, 12,177 deferred and 9,872 pensioners)
• DB final salary/career-average
Our current asset strategy split is 69% in equities, 20% in bonds, 10% in property and 1% cash. Of the total portfolio, 39% is in UK equities and 30% is invested in overseas equities according to a regional approach. We currently hold European equities, passive emerging markets, north American, Japanese and Pacific Rim equities.
We are transitioning 19 percentage points from UK active and European mandates into global equity this March, which will be invested with Threadneedle Investments and Baillie Gifford.
We made the decision to invest in global equities over the last 18 months. BlackRock’s UK equity mandate was not performing, so we decided to make an allocation to a passive mandate and move the rest into global mandates.
Of the two global equity mandates, one is a growth mandate and the other an income mandate, but we will not expect to receive income in cash – we will be rolling it back into the mandate. The fund does not have any immediate need for cashflow, and in any case, we are getting dividends from a segregated UK mandate.
We wanted to appoint two global equity managers with contrasting styles but we have not really looked at our equity mandates as any kind of LDI matching portfolio. As far as matching the liabilities is concerned we have not undertaken any large-scale exercise or drilled down in detail. We are looking for good performance because we are well funded for a UK local authority scheme with an 89% funding level, as of March 2013.
We have not seen any need for high-alpha mandates to generate performance. We look at the dividend yield that the manager can get out of the mandate, the consistency and a turnover level that is as low as possible. We are aiming for 2-3% above the MSCI All World.
Within MN my team is responsible for the €3bn European portion of the equity portfolio. We replicate the MSCI Europe index with an exclusion policy, on which clients have input.
The exposure is managed on an indexed basis, but we dynamically allocate across regions and look at several sources of alternative data. We do not, however, dynamically allocate a criteria of value over growth, or any other traditional style.
The team continuously evaluates whether this is the optimal approach, with alternative data to make sure we exploit the risk premium in the market so the approach is best aligned with the objectives of our clients. Our clients are pension funds with long investment horizons, longer than other investors and where preservation of capital is important.
We have considered the possibility of selecting companies on the basis of dividend characteristsics, but we have not included this as standard operating procedure in the strategy. It is too specific and too difficult to replicate in a rules-based approach, and at this point we are highly rules-driven in implementing our strategies.
We can offer such an approach if our clients want it, but it is not something we currently consider. Our approach is about optimising the portfolio with the set of performance data – including more sustainability parameters in the future. We are currently evaluating the areas of sustainability that we will examine.
There is a wide spectrum of ESG intensity. There is a simple exclusion where we exclude a few companies that do not comply with our internal standards. We can look at companies that have a higher likelihood of reputational problems when we assess inclusion or exclusion.
The next step is positive screening, and also screening for companies that are best in class. Finally, the ultimate utopia for responsible investing is probably impact investing. But sustainable investing always has to be combined with appropriate yield and return and these should not be impacted by investing along these lines.
Henrik Olejasz Larsen
• Location: Hellerup
• Assets: DKK150bn (€19bn)
• Manager for labour-market pension funds
• DC with guaranteed and non-guaranteed life annuities
We have structured our equity portfolio so that it is to a large extent rule-based, with 80% in rule-based strategies and most of that in global benchmarks. I would not describe it as passive, as we do not exclusively use market-cap benchmarks.
More than half of that is in what we call an enhanced global cap-weighted index, where the enhancement is an overweight in small caps, low volatility and value companies. There is no subjective judgement in choosing the companies – the only subjective overlay we have is an ethical screening process.
The remainder of the global equity portfolio is in a traditional cap-weighted format. The objective is to obtain our equity return at low cost, both direct management costs and low transaction costs.
The criterion for a value company is rule-based, built from metrics such as the price-to-book and other accountancy measures. The rules were developed with State Street, and are not something that will change based on a tactical point of view but will evolve based on developing research.
Our approach will be from an overall risk perspective with macro and sector views. We will not take positions on any single stock. Internally, stock buying will be part of a strategy, such as targeting a portfolio of companies. One example is gaining exposure to the US building industry in the expectation of a construction upswing, something we had for a period of time but not at the moment.
Income versus value is not something we directly pursue and there are reasons for that. We manage stocks on a mark-to-market basis, so we have no liquidity restraints and do not need cashflow. We would select stocks from the perspective that they create a stable total return.
We have, for part of our emerging market portfolio, rules-based strategies where we select companies with a stable dividend yield – but that is primarily for controlling governance risk. It is a commitment to a shareholder-value approach that you pay out a certain amount of your income stream to the market.
In emerging markets you will find semi-governmental companies with a large state minority or majority stake, or with large family shareholdings. Here we have selected for indicators which we hope will protect us against some of the biases that otherwise enter our portfolio from sub-optimal governance structures.
Interviews conducted by Jonathan Williams