Clwyd completes strategic overhaul on the back of strong returns

Part of that overhaul began in April 2014 with the addition of a long-term risk management strategy structured through a liability-driven investment portfolio.

The fund’s LDI strategy, composed of regional and global equity, gilt and inflation exposures, aims to hedge 40 per cent of the interest rate and inflation risk across liabilities by 2019 using time and market-based triggers.

LDI boosts fund performance

Clwyd returned 14 per cent in the year to March, well ahead of the fund’s long-term benchmark of 7 per cent.

This is a great example of where economies of scale that the government is clearly seeking from pooling are already in play

Kieran Harkin, JLT

The LDI portfolio racked up a 44.7 per cent return during the period, driven largely by synthetic exposure to passive developed equities structured through a total return swap.

Kieran Harkin, director at consultancy JLT Employee Benefits and investment consultant to the £1.4bn scheme, said the equity exposure functioned as collateral to fund the wider LDI portfolio.

“Over time, as you get a funding level appreciation, there is less reliance on the equity component and that starts to fall away,” said Harkin.

Barry Jones, investment consultant and head of LDI research at consultancy KPMG, said synthetic equity exposure freed up capital previously held in equity assets to be deployed elsewhere.

“A lot of schemes have looked at this that are holding passive equities,” said Jones. “You can maintain exposure to the equity market but increase the amount of bonds in your portfolio.”

Elsewhere in the portfolio, the fund’s active equity exposure across global, emerging and frontier markets netted a 13.5 per cent annual return for the fund. Some of these gains have, however, been “given back” during recent market volatility, according to the fund’s latest annual report.

Strong returns for the fund’s real assets exposure through infrastructure, property and agriculture were tapered by falls in the value of the commodity holdings over the period. The fund has now divested from its commodities mandate.

Final piece of the jigsaw

Recommendations of a 2014 review of the fund’s investment strategy were approved in November 2014 and will be fully implemented by the end of this year.

Clwyd Pension Fund’s committee approved a 4 percentage point reduction of the 13 per cent allocation to hedge funds and recently appointed Man FRM to manage the £120m holding – 3 per cent in hedge funds and 6 per cent in managed futures – through a managed platform.

Clwyd has joined Cornwall Pension Fund on the platform, which invested 8 per cent in hedge funds in January this year.

Harkin said funds collaborating on the platform benefit from a competitive fee position while retaining strategic oversight on decision-making.

“Clwyd and Cornwall each have a separate sub-fund. Whatever happens within the hedge fund is at the discretion of the advisers and the pension fund in each sub-fund,” Harkin said.

Focus on pooling

Momentum has gathered around collaborative investment and asset-pooling in the Local Government Pension Scheme since the July Budget. 

At the Conservative party conference last month, chancellor George Osborne unveiled plans to create six British wealth funds, each with assets of around £25bn, in a move to drive down costs across the LGPS.

Clwyd selected Man FRM’s collaborative vehicle prior to the summer Budget according to Harkin.

However, he said “there was certainly one eye towards the collaboration focus that was likely to come along”.

“This is a great example of where economies of scale that the government is clearly seeking from pooling are already in play.”

The allocation is due to be fully funded by December, at which point Clwyd will assess shorter-term, tactical opportunities in a new best ideas portfolio, designed as a tactical overlay across the entire strategy.