• Risk Considerations in an Investment Strategy
• Rob Wilson• Philip Hebson
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What we are going to cover
• Current Position• Understand Fund Objectives• De-Risking Framework• RiskOmeter and Risk Appetite
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£1,7
21
£1,9
52
£2,7
95
£2,4
88
£2,6
06
£3,0
65
69%75%
91%
0%
20%
40%
60%
80%
100%
£0
£500
£1,000
£1,500
£2,000
£2,500
£3,000
£3,500
March 2013 March 2016 March 2019
WPF Solvency Funding Position
Assets £'M Liabilities £'M Solvency Funding Level
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0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%
Equities Fixed Income Cash Property &Infrastructure
Otheralternatives
Actual Asset Allocation compared to LGPS Average
WPF Actual March 19 LGPS Average March 19
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Asset Class Target Allocation
Role (s) within the strategy
Equities75% Long term growth in excess of
inflation; generate investment income, i.e. dividends
Fixed Income (currently Bonds and Corporate Private Debt)
10% Diversified source of income and provides a degree of protection from changes in interest rates
Property
15%
Diversification; generate investment income; provide some inflation-sensitive exposure; illiquidity premium
Infrastructure
Provides the fund with access to a diversified (but long term illiquid) return source and a stream of inflation related income
Role of Asset Classes in the existing strategy
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Fund Current Position• Good Funding position
• Investment Strategy target 75% Equities, 15% Property & Infrastructure & 10% Fixed Income
• Extended Equity Protection• Continued Diversification from Equities
into Property and Infrastructure• However mindful of what goes
up can come down!!
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What happened in 2007/8
Understand Fund Objectives
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The investment objective is to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme.
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WPF LONG TERM OBJECTIVES• Enable employer contribution rates to be kept as
nearly constant as possible and at reasonable cost to the taxpayers, scheduled, designated, community and admitted bodies
• Manage employers’ liabilities effectively• Ensure that sufficient resources are available to
meet all liabilities as they fall due, and• Maximise the returns from investments within
reasonable risk parameters
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Conflicting Requirements and Objectives
STRIKING THE RIGHT BALANCE
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I would like to De Risk But……
• Despite improved funding cost of new benefits above long term target
• Long term aim to generate returns above inflation –protection assets too expensive
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What is de-risking (Framework)? De-risking is essentially reducing the level of risk inherent in the Fund’s investment strategy General themes to be considered as part of any de-risking decisions for the Fund:
• Reducing allocations to the riskier asset classes • Restructuring the Fixed Income portfolio to provide a
better “match” against liabilities • Long term plan to reduce risk without affecting the
chance of recovery • Unlikely to remove risk assets entirely even if funding
level improves dramatically
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SUMMARY
• Objectives are more important than ever understand what your objectives are
• Ensure your strategy is aligned with your objectives• Adopt a governance framework / model to get the
best out of your strategy
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Risk examples in Current Strategy
The objective is for as lower risk that is possible, while still seeking good rewards on our investments
What fits where on our riskometer?
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Differing risk appetite?
“Safe bet”: Back the favourite, lower potential reward (passive investment)“Risk bet”: Back the outsider, higher potential reward (active investment)
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Containing some risk....Equity downside protection strategy with River & Mercantile
Trying to have cake and eat it....
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F U N D I N G S T R AT E G Y S TAT E M E N TA S T R AT E G Y N O T A S N A P S H O T
FUNDING
INVESTMENTS
COVENANT
R I S K
T H E F U N D I N G P L A N C O M E S D O W N T O M A N A G I N G R I S K I N T H E S H O R T A N D L O N G T E R M
• Agree a plan to balance risk versus long term affordability
• What level of risk is acceptable?• What is the ultimate objective?
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Methods of measuring risk...
Alpha, beta, R-squared, standard deviation and Sharpe ratioBeware, risk measurement uses historic data to predict the future, which can be unpredictable!From the beginning then......
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.....okay, that is for another time!!!
...one for Mercers?!
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QUESTIONS ?
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