The Dairy Crest Pension Fund has derisked while restructuring its investment portfolio by moving away from UK investment grade credit and ‘going global’, as schemes continue to reassess the purpose of their credit exposures.
Many pension funds are on the lookout for opportunities to diversify while managing risk, and global credit has proved popular among some, such as the Jaguar Land Rover scheme, due to its ability to meet this need.
The main benefits that you get from going into global credit include better diversification, a better balance of industries, a better choice of issuer names and ultimately much better liquidity
Pete Drewienkiewicz, Redington
Trustees at the £1.1bn Dairy Crest Group Pension Fund also made a number of changes to the portfolio over the first two quarters of 2016. This included “a switch of the fund’s UK investment grade credit holding into global investment grade credit” in March, says a report to members.
In addition, the scheme revealed a transfer of £50m of surplus collateral from Insight to Pimco for investment in global investment grade credit. This was completed in April 2016.
The scheme derisked by selling down £7m of equities, and the trustee also implemented an arrangement with one of its incumbent investment managers “to phase in additional liability hedging up to 50 per cent of technical provision liability by October 2017”.
Diversification and derisking
Annabel Gillard, director at M&G Investments, said the main reason for switching from UK investment grade credit to global investment grade credit would be diversification and risk reduction.
Historically, “there was a natural tendency for pension schemes to hold UK credit because it was a proxy for liability matching and it offered a little bit of extra return”, said Gillard.
However, she explained that over the last 15 years, that liability matching role has been played by liability-driven investment. Consequently, schemes have revisited their credit holdings to decide whether the portfolio is there as a liability proxy, or to generate some return, and if it is there to generate return, pension funds are looking to see whether there are more efficient ways of doing so.
Gillard said one of the ways that pension schemes have looked to diversify is to “go global” or opt for multi-asset credit.
Opting for global credit provides schemes with a lot more opportunities, and “it is more liquid and a deep market” so it is efficient and “cheap to place trade”. Gillard said this can help with better diversification while lowering risk.
European investment grade credit is attractive for the lower volatility and wider range of opportunities on offer, but the US “is the most developed credit and high-yield market in the world”, Gillard noted.
Liquidity benefits
Pete Drewienkiewicz, head of manager research at consultancy Redington, agreed that the main reasons for moving into global credit usually relate to “diversification and better liquidity”.
He highlighted the fact that the UK credit market “is not huge” and is dominated by certain industries.
However, “the main benefits that you get from going into global [include] better diversification, a better balance of industries, a better choice of issuer names and ultimately much better liquidity”, said Drewienkiewicz.
When searching for the right sort of manager, he said that looking for a credit manager who “doesn’t follow the herd too much is always good… managers that have conviction and are able to be buying when other people are selling, and adding risk when it’s cheap”.
Jaguar Land Rover revs up global credit
Jaguar Land Rover has decided to alter the strategic asset allocation in its two pension schemes by boosting its exposure to global credit, while decreasing assets held for the purposes of matching changes in the fund’s liabilities.
He said that it is a “very bottom-up game”, so a robust research process is key to critique companies and make sensible judgments about whether they are creditworthy. Drewienkiewicz added that good execution is important, as well as “not paying too much”.
Cast the net wide
David Rae, head of client strategy and research at Russell Investments, said the net should be cast as wide as possible in the pursuit of investment opportunities when it comes to global credit.
Where to look for global credit investments
The year could end as it began for bond markets: amid a wave of event-driven volatility. Following the presidential election, the US market has rushed to price in the risk of successful reflationary policies and concomitant tightening of monetary policy.
He said many non-traditional areas of the fixed income market have been under-represented in pension scheme investment portfolios. These include bank loans, collateralised loan obligations, high-yield bonds, convertibles and emerging debts, he said, which “all offer relatively attractive risk and return characteristics”.
With regard to derisking, Rae said that for some schemes, “the key focus is to generate the required returns in more efficient ways” citing reducing equity exposure in favour of investments that sit higher up the capital structure as a prime opportunity.
