The minimum funding requirement (MFR) will have little impact on the investment strategy of the £1.5bn ($2.4bn) Philips UK Pension Fund as the fund carried out an asset liability study in 1993.
It has since moved from a minimal position in index-linked gilts to a current holding of over £400mn ($640m).
As managing director Da-vid Fry says; Our holding position is coming quite close to the MFR. We have already moved away from being fundamentally driven by our performance to being driven by a wish to have a closer match between our assets and our liabilities.”
The trend towards a more conservative strategy will be reinforced in April when the company introduces a de-fined contribution scheme for new employees. This will increase the weighting in index-linked gilts, obviously at the expense of its equity holdings.
The fund has just over 5% in property and 30% in index-linked gilts. The remaining 65% is in three portfolios. Two are actively managed by Fidelity and Schroders, with an index-tracking portfolio handled by Barclays Global Investors.
The fund applies a WM50 benchmark, so around 70% is held in the UK and the rest overseas. Due to the nature of its investment strategy, the fund is in discussion with WM about developing a customised benchmark.
“The fund manager has latitude to alter those UK/ov-erseas overall percentages, within a bandwidth,” Fry adds. “He doesn’t have any constraints on individual ov-erseas markets: that is down to the individual fund manager.”
“If they go outside the boundary we have given them, they then require the agreement of the trustees but it would have to be a reasonably extreme move when WM50 is the benchmark. It would require an extreme move by funds in general or for them to have a view different from rest of the universe.”
Fry does not expect any significant decline in the market and hopes for steady growth in 1997. His strategy is secure in the face of market uncertainty over the general election and over any turmoil surrounding the introduction (or not) of the Euro.
“Because we have a fairly conservative approach to our investment strategy we would not see ourselves being fundamentally influenced by a change at the election,” he says, adding wryly, “we basically take the government view of ‘wait and see’ on the Euro question.”
With 1996 such a good year for fund managers in general, he hopes they will outperform the market again this year. “We ask our fund managers to outperform other fund managers rather than to outperform the market. Whether they will or not, we will have to wait and see but we would be disappointed if our two fund managers do not produce a good performance.”
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