• Risk Considerations in an Investment Strategy

• Rob Wilson• Philip Hebson

1

2

What we are going to cover

• Current Position• Understand Fund Objectives• De-Risking Framework• RiskOmeter and Risk Appetite

3

£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

4

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

5

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

6

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!!

7

What happened in 2007/8

Understand Fund Objectives

8

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.

9

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

10

Conflicting Requirements and Objectives

STRIKING THE RIGHT BALANCE

11

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

12

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

13

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

14

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?

15

16

Differing risk appetite?

“Safe bet”: Back the favourite, lower potential reward (passive investment)“Risk bet”: Back the outsider, higher potential reward (active investment)

17

Containing some risk....Equity downside protection strategy with River & Mercantile

Trying to have cake and eat it....

18

19© 2019 Mercer Limited. All rights reserved.

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?

3

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......

20

.....okay, that is for another time!!!

...one for Mercers?!

21

QUESTIONS ?

22