The Worcestershire County Council Pension Fund has placed JPMorgan Asset Management “on watch” for the continued underperformance of its emerging markets equities mandate, just six months after removing its added scrutiny of the manager.
The £2.8bn fund had previously had the manager on watch from September 2016 until March 2018.
It has also had JPMorgan on watch since September 2016 for its management of the fund’s global corporate bonds mandate. It elected to keep the manager on watch at its October meeting.
You should expect outperformance relative to a benchmark over an agreed timeline
John Simmonds, CEM Benchmarking
Meanwhile, the fund’s investment adviser MJ Hudson Allenbridge has mooted a review of Worcestershire’s equity protection strategy as part of an assessment of its strategic asset allocation.
Trump trade war hits Worcestershire
The fund benchmarks JPMorgan against the performance of the FTSE All World Emerging Market Index, which grew 5.9 per cent in the year to June 2018.
According to an investment update provided to the fund’s pensions committee on October 5, performance for the year ending in June 2018 was 0.1% below its benchmark.
The portfolio underperformed against the benchmark over the most recent quarter by 3.7 per cent. Over the past three years, JPMorgan has fallen short of its performance target by 0.4 per cent a year.
A spokesperson for the fund said the manager will remain on watch “until consistent outperformance is regained”.
The spokesperson disclosed that JPMorgan has attributed its underperformance to “a sharp rise in the US dollar and a bout of risk aversion [that] hit vulnerable markets like Turkey, and pressured emerging market currencies broadly”.
JPMorgan has also blamed “an escalation of US threats to China on trade weighed on Chinese stocks, particularly exporters, many of which were large contributors to performance in 2017,” the spokesperson said.
JPMorgan declined to comment.
Funds should expect outperformance
JPMorgan’s management of Worcestershire’s bonds mandate is measured against the Barclays Capital Global Aggregate Bond Index.
The mandate has consistently underperformed this benchmark. Over the past three years it has underperformed it by 0.54 per cent annualised, and the past 10 years by 0.63 per cent.
A Worcestershire spokesperson said the fund will remain on watch “until their three-year performance is tracking further towards target”.
“Bond markets as a whole had a volatile and varied quarter with a mixed experience on a sterling adjusted basis, against the continuing background of anticipated rate increases and the implications of quantitative tightening,” according to a report prepared for the fund by MJ Hudson Allenbridge.
“If you believe in active management, and you’re prepared to pay for it, you should expect outperformance relative to a benchmark over an agreed timeline,” said John Simmonds, principal at CEM Benchmarking.
Find the balance with equity protection
Over the quarter ending in June, the fund produced a total return of 2.9 per cent over the quarter against a benchmark of 4.9 per cent.
“This was mainly attributable to a negative contribution from the equity protection strategy as markets rose above the upside limits,” according to the MJ Hudson Allenbridge report.
Equity protection strategies, such as ‘put spread collars’, cover funds from a predetermined level of market downside, giving up some equity market rise potential in the process.
The fund implemented its equity protection strategy mandate for an 18-month period with River and Mercantile in order to secure some protection “against a relatively significant fall in equity values”.
The strategy was designed to last until after the fund’s next triennial valuation in April 2019, after which the position can be reviewed.
Thales ups alts for predictable cash flows
Trustees of the Thales defined benefit pension fund have taken steps to move away from listed equities and increased the scheme’s exposure to investments with more predictable cash flows.
“Given that the risks associated with the Fund’s relatively high allocation to equities may no longer be justified, consideration of a switch to some other asset classes will be included in the strategic asset allocation review,” the report states.
David Walker, head of LGPS investments at consultancy Hymans Robertson, said it was important for funds to find the balance between equity downside protection and upside potential in order to meet their funding objectives.
“There are other ways of managing equity risk, and one way that we’ve seen clients look at is just to reduce equities and invest in other asset classes,” he said.
Mark Davies, managing director of River and Mercantile Derivatives, said thatwhile Worcestershire’s equity returns are below benchmark, the fund is still strategically ahead of what it needs to meet its funding objectives.
“The aim of an equity protection strategy is to provide protection (which cannot be free) by sacrificing returns that are not necessarily needed,” he said.
“In a similar way, the strategy over recent weeks will have added value, but this should be considered alongside the fall in equity markets. The point of equity protection strategies is that this behaviour is known in advance and hence is easily governable.”
