How do you approach the hedging side of the portfolio?
We have actually stalled our hedging programme at the moment. A strategy review we did just before Christmas resulted in a lower investment return target because we had made a profit. In 10 years I expect us to be over-funded and 90% hedged, however does that mean I am just going to buy blindly on price? No. We have always been in the lower-for-longer camp and we have an ongoing debate with the bank’s own economists as to the future path of interest rates so that we have enough hedging in place to dampen the funding volatility from a liability perspective and allow the asset growth to make up the deficit over time. If markets wobble tomorrow I will not be too worried as it won’t have an immediate actuarial effect. But if there are opportunities to
hedge we will take them and that is why we did a big trade by selling down our pool of index- linked gilts and increasing our synthetic inflation exposure via swaps just before the Consumer Prices Advisory Committee (CPAC) announcement in January 2013. We thought pure inflation trading was very anomalous and we gambled on ‘no change’ and we were right. That has been a profitable transaction for us.
You mentioned investment in Africa as an opportunity. How are you accessing it?
Africa is a fascinating play but it is certainly a shotgun approach rather than a rifle. There are so many good things going on there with the economic and geopolitical background and advance of the middle classes and consumerism. There is a six-to- 10-year wave and as the tide rises pretty much everything will do well. We are trying to capture the broadest opportunity set possible
and I can see us making investments with multiple managers in multiple areas – both funds and co-investments – and we are going to have some failures in that, but I think even the mediocre ones are going to do well. The triggers for that are the local entrepreneurs who made their money through the original tech boom are reinvesting back into their own countries rather than moving to some tax haven. Mobile banking is more prevalent in Africa than anywhere else in the world and China is using it as a low cost producer. It has so many good things going for it and we are
only at the base camp. Given our natural style we will probably do more private than public investment. We will probably do quite a lot of debt and real assets and we may buy some land. But the few quoted equities in Africa don’t give us the play we want.
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