This report details how the three AVC Funds – the Short-Dated Gilts Fund (SGF), the Equity Biased Fund (EBF) and the Mixed Portfolio Fund (MPF) performed during the year ending 31 March 2019, as well as detailed information on how the MPF Fund is invested. At a glance: Performance of the Funds* The chart below shows how £100 would have changed in value over 10 years if invested in the SGF, EBF or MPF. A group of external funds with similar objectives to the MPF is included for comparison purposes. * Past performance is no guide to the future. The value of the MPF can fall as well as rise. Additional Voluntary Contributions (AVC) Funds Investment Commentary 2018/19 Total Fund Growth over 10 Years THE AIRWAYS AND NEW AIRWAYS PENSION SCHEMES 2009 External MPF EBF SGF 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 £100 £125 £150 £175 £200 £225 £250 £275 £300
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This report details how the three AVC Funds – the Short-Dated Gilts Fund (SGF), the Equity Biased Fund (EBF)and the Mixed Portfolio Fund (MPF) performed during the year ending 31 March 2019, as well as detailedinformation on how the MPF Fund is invested.
At a glance: Performance of the Funds*
The chart below shows how £100 would have changed in value over 10 years if invested in the SGF, EBF orMPF. A group of external funds with similar objectives to the MPF is included for comparison purposes.
* Past performance is no guide to the future. The value of the MPF can fall as well as rise.
Our AVC Funds in DetailOur ‘AVC Plan – information leaflet’ is available on the AVCFunds page of our website, www.mybapension.com anddescribes the three AVC Funds available, the different type ofreturn each fund provides as well as information about how youcan manage your AVC investments between the three funds.
Short-Dated Gilts Fund (SGF)“The return for monies invested in the SGF forthe whole of 2018/19 was 0.81%.”
The investment objective of the SGF is to produce returnsrelated to the interest rate on government gilt-edged securities.Rates of interest vary from year-to-year but the value of theinvestment cannot go down. SGF investors will receive theaverage rate from the three highest-yielding gilt-edgedsecurities, which have less than five years to maturity. Interestis applied annually to money held in the SGF at the beginningof the Scheme year. The return for money invested in the SGFfor 2018/19 was 0.81%. Money that is invested in the SGFduring the Scheme year receives interest on a proportionalbasis. For example, money invested in July and held to the endof the Scheme year will receive eight-twelfths of the currentannual interest rate. Where funds are switched into, or out of,the SGF during the year, interest is calculated separately inrespect of the money held before and after the date of theswitch.
Equity Biased Fund (EBF)“The total return for monies invested in the EBFfor the whole of 2018/19 was 7.46%.”
The investment objective of the EBF is to produce a return,which consists of two parts - a Guarantee Component and aBonus Component.
Guarantee Component - this rate is declared each calendarmonth and is currently based on the monthly return on theSterling Overnight Index Average rate (SONIA). The Trusteescan change the index from time to time, having taken suitableadvice. For the year 2018/19, the annualised interest rate forGuarantee Component averaged 0.62% over the year. TheGuarantee Component cannot be less than zero.
Bonus Component – for the year 2018/19, the BonusComponent was 6.6%, declared in advance. The total returnfor monies invested in the EBF for the whole of 2018/19 was7.46%.
From April 2019, following a review of the AVC arrangements,the Bonus Component rate will be announced monthly, inarrears (the rate for each month is worked out on the last dayof that month). The calculation of the Bonus Component isbased on the returns from a mixture of different assets, with thelargest portion being related to various equity markets. Thereturns will therefore tend to rise and fall in line with theperformance of the stock market. As per the approach prior toApril 2019, the returns are smoothed over time so that someof the investment returns in years of good performance arekept in reserve to cover years when returns may not be sogood. The return in the EBF can never be negative, but it is still
possible for the Bonus Component to be zero. The BonusComponent contains an allowance for the cost of making surethat the overall EBF return is no lower than the return achievedby the Guarantee Component. The cost of providing thisguarantee has been revisited as part of the review and fromApril 2019 is set at 2.3% a year (previously 4.0% a year), whichis deducted from the Bonus Component rate.
Money that is invested in the EBF for the whole of a calendarmonth will be credited with interest for the month at a ratecomprising both the relevant Guarantee and BonusComponents declared for that month. Money that is investedin the EBF for part of a calendar month will be credited withinterest at a rate comprising the Guarantee Componentdeclared for the previous month, pro-rated to reflect the part-month.
Mixed Portfolio Fund (MPF)“The MPF returned 5.62% for the year ending 31 March 2019.”
The MPF is a pure money purchase arrangement, similar to aunit trust. Money invested in the MPF Account is used to buyunits, the value of which depends on the investment value ofthe underlying assets of the MPF. The value of the units can goup or down. The investment objective for the MPF is reviewedevery three years. It sets the framework for the types ofinvestments the MPF can hold and what percentage of the MPFshould be invested in each type of asset class.
The Fund benchmark currently has 80% of the assets inequities, split between the UK, North America, Europe, Japan,Asia Pacific and Emerging Market regions. The remainder ofthe Fund’s benchmark assets are in bonds (18%) and cash (2%).
Investment returns are derived from capital growth, dividendand interest income. Investments in equities tend to be riskierand more volatile than many other types of investment whichmeans the value of the Fund can fall as well as rise. In addition,the overseas investments are in foreign currencies and theirvalue may fall or rise when measured in Pounds sterling. Thereare arrangements in place, known as currency hedging, whichaim to partly protect the portfolio. The currency hedge seeks toreduce the long-term volatility of the Fund by lowering theFund’s exposure to foreign currencies.
MPF Fund BenchmarkThe Trustees set a benchmark for each type of asset class heldwithin the Fund and use this to monitor the Fund’sperformance. For example, the performance of UK equities ismeasured against the FTSE All Share index. Each asset has itsown benchmark comparator and these are combined to form acomposite benchmark. The performance of the MPF will vary
Investment Commentary 2018/19
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Neither the SGF nor the EBF are classified as pure moneypurchase funds. There is a risk that money in the SGF orEBF might be used partly or wholly to make good otherpromised Scheme benefits if APS or NAPS were ever towind up with insufficient funds to pay all the promisedbenefits in full.
from the benchmark to the extent that actual assets held by theMPF have deviated from the composite benchmark.
The Trustees have set a target for the Fund Manager to exceedthe weighted return on the benchmark assets by 0.5% p.a.measured over a five-year period. The approach to achievingexcess return above the benchmark involves exercisingdiscretion in allocating between the asset classes describedabove, as well as selecting individual equities and bonds withthe objective of outperforming the underlying indices.
The chart below shows how the MPF was invested on 31March 2019.
Performance of the MPFThe MPF returned 5.6% over the year, with most asset classesposting positive returns over the 12 months to March 2019.The benchmark the MPF is measured against returned 5.4%,and so the fund outperformed by 0.2% over the year.
The Fund’s target is to beat its benchmark by an average of0.5% per annum over a five-year period. This goal has not beenachieved over the latest five years, largely due to poor relativeperformance from the fund in 2015/16.
The return on the MPF was however meaningfully above theaverage 4.5% achieved by other large AVC providers in themarket place over the latest year. Over longer time periods theMPF has similar performance to these other funds. The returnsare described in more detail in the ‘AVC Funds PerformanceReturns’ table on page 4.
Although fund returns were positive, the 12 months to March2019 saw a considerable amount of volatility in markets.Markets were disrupted by political risks, increasedprotectionism, Chinese adjustments to government policiesand uncertainty surrounding the UK’s withdrawal from theEuropean Union.
Whilst US growth has remained strong, sentiment has beenimpacted by Trump’s trade wars and concerns raised aboutcompanies’ willingness to invest. In the eurozone theeconomic recovery has stalled, and inflation is muted.Adjustments in the German car industry to emission
regulations have weighed on the region for longer thanexpected.
In the face of such worries, the US Federal Reserve Bank andthe European Central Bank have had to rethink their plans toend accommodative monetary policy such as low interest rates.Expectations of future rate rises have been tempered withmany economists now expecting the Federal Reserve to cutrates materially before the end of this year.
While lower rate expectations caused equity markets to rally inQ1 2019, safe-haven currencies such as the US dollar andJapanese yen have out-performed and bond yields have fallen.
In the UK, unemployment rates are low and wage inflation isstarting to come through in line with the Bank of England’sexpectations. Brexit has however impacted economic data andmarkets and the Bank of England is likely to hold back from anychange to interest rates until the “fog has cleared”.
The chart below shows the return for each asset class within theMPF over the 12 months to the end of March 2019.
The US stock market was the best performing area buoyed bystrength in the technology sector. UK equities also did well asfears of a “hard Brexit” receded. Weakness in Japanese equitieswas caused by a slowdown in industrial sectors particularlyimpacted by lower Chinese demand.
As we move forward, any clarity on Brexit or an easing of UStrade tensions should support growth and restore confidence.China appears to have moved to counter some of the economicslowdown seen in mid-2018 which should provide a measureof stability.
Political risks, however, remain heightened. In the UK theBrexit impasse on the Withdrawal Agreement from theEuropean Union continues, and in the US, the markets willincreasingly focus on the 2020 Presidential Election.
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Benchmark Asset Class Performance in Sterling: 31 Mar 18 - 31 Mar 19
Bonds(15%)
Cash(2%)
UK Equity(25%)
International Equity(58%)
Emerging Markets 2%
Government7%
Corporate8%
Asia Pacific11%
Japan 6%
Europe12%
NorthAmerica27%
UK EquityNorth American
Equity
European EquityJapaneseEquity
Asia Pacific EquityEmerging MarketEquity
UK Government Bonds
UK Corporate Bonds
Cash
-5% 0% 10%5%
Mixed Portfolio Fund’s 10 Largest Holdings The chart below shows the largest ten holdings in the MPF asat 31 March 2019 with the percentage of the Fund invested.
Corporate GovernanceThe Portfolio Managers follow the UK Stewardship Codewhich aims to improve and enhance the quality of engagementbetween companies and institutional investors. The PortfolioManagers monitor and engage with companies on aspects ofcorporate governance and exercise voting rights in all regionsthrough our custodian bank. Research and monitoring aspectsof corporate social responsibility are also taken into account toassess impacts on shareholder value. In respect of climatechange, the Fund Manager participates in the CarbonDisclosure Project investor initiatives to encourage investeecompanies to disclose their impact on the environment andnatural resources. The voting records of the Fund Manager areheld on our website: www.mybapension.com in the ‘CorporateGovernance’ section of the ‘Scheme documents’ page.
Unit Price and ChargesThe MPF unit price changes monthly according to theperformance of the Fund. The number of units bought eachmonth will depend on the money invested and the unit price.Expense charges are incurred when buying and selling units inthe MPF. These are currently being paid by British Airways.There are no expense charges paid by members in the SGF orthe EBF; any expenses are classified as Scheme expenses.
AVCs are a long-term investment and the historical returns aredetailed below. Monthly and annualised returns for all AVCFunds can be found on the ‘Latest AVC Fund Rates’ page of ourwebsite.
AVC Funds Performance Returns*Annualised fiscal year return over the period to 31 March2019.
*Past performance is no guide to the future; the value ofinvestments can fall as well as rise.
MPF Fund 10.7% 7.7% 10.0% 5.6%MPF Benchmark 10.8% 7.9% 10.0% 5.4% EBF Fund 5.4% 7.8% 6.9% 7.5%SGF Fund 1.0% 0.7% 0.6% 0.8%External Fund 10.2% 7.3% 8.7% 4.5%
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THIS STATEMENT IS ISSUED BY BRITISH AIRWAYS PENSIONS INVESTMENT MANAGEMENT LIMITED, WHICH IS REGULATED BY THE FINANCIALCONDUCT AUTHORITY. THIS STATEMENT IS INTENDED FOR MEMBERS OF THE APS AND NAPS AVC PLAN ONLY.
PAST PERFORMANCE IS NOT A GUIDE TO THE FUTURE; THE VALUE OF INVESTMENTS, UNLESS OTHERWISE STATED, CAN FALL AS WELL ASRISE. THE CURRENT RATES OF RETURN ARE PUBLISHED ON WWW.MYBAPENSION.COM
