Helen Roberts joined the NAPF as investment policy lead in January this year to spearhead its policy work on investment issues. She has been specifically tasked with engaging in the debate around low gilt yields, improving the NAPF’s awareness of alternative asset classes and considering the implications of the economic outlook for funds when trading off risk and return
“There is general agreement [among our members] that illiquid assets do play a part in defined contribution investing and daily liquidity is not essential.”
Helen Roberts
Roberts has a wealth of experience in bond portfolio management, having occupied roles as head of UK gilt and inflation-linked bonds at Hermes Fund Managers and more recently head of government bonds at F&C Investments, where she spent 13 years. Here she speaks to portfolio institutional about the issues facing the NAPF’s membership and the wider industry. The National Association of Pension Funds (NAPF) represents some 1300 UK schemes across the defined benefit (DB) and defined contribution (DC) space, with around £900bn under management. In recent years it has lobbied governments in the UK and Europe on investment issues such as longdated index-linked gilt issuance, financial transaction tax, Solvency II and over-thecounter (OTC) derivative clearing regulation. What are the main investment concerns for NAPF members?
The focus for pension schemes currently is at both ends of the investment spectrum. So on the one side they’re looking at hedging liabilities and the investments associated with hedging and on the other side they are looking at the assets they need to achieve investment returns, so risk-seeking assets. Despite equities doing better and yields going up, derisking is still in vogue as pension funds continue to match their liabilities more closely. To this end, pension schemes are looking more and more at liability driven investment (LDI), so looking at hedging out inflation risk and interest rate risk. A new theme is the increasing use of derivatives by pension schemes to enable them to hedge their liabilities more closely, particularly the use of inflation swaps and swaptions.
People say ‘derivative’ is a dirty word and they can be quite off-putting for trustees. Do you find that to be the case?
Pension funds are getting more comfortable with using derivatives, particularly for hedging purposes. But still, there is some concern among members about counterparty risk involved, particularly in over-the-counter (OTC) derivatives.
How are schemes looking to hedge their liabilities?
Traditional LDI hedging strategies are being complemented by the use of ‘hedging surrogates’. These assets would include investments in infrastructure, social housing and private rents. The beauty of these assets is that they have inflation linkage which schemes need to match their liabilities more closely, but also extra yield when compared to inflation-linked gilts. However, the disadvantage of these assets is the lack of liquidity.
How are pension funds seeking to address the low yield world?
As bond yields have fallen dramatically and given that interest rates appear anchored at very low levels for some time, pension funds are worried that investment returns will be low for a prolonged period. They are looking at assets that enhance yield and are willing to embrace a bit more risk premia. Pension funds are looking at emerging markets for example, which are increasingly popular among larger pension schemes despite the recent correction.
Emerging markets have had a rough ride of late so which side of EM are pension funds looking at?
Pension schemes are interested in both EM debt and equities. We recently wrote a piece on China, but from evidence based on discussions with pension schemes, there’s not a lot of direct investing in China, as yet. This is despite the realisation that it will soon become the largest economy in the world. Pension funds are however, looking at ways of getting exposure to equities linked to Chinese growth. The problem with investing directly in China at the moment is that there are limits in terms of capacity, transparency and liquidity. Furthermore, governance is a hurdle to investing in China directly for some schemes.
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