Reuters scheme simplifies strategy in liquidity search

In May, the Pensions Regulator’s annual funding statement emphasised the need to consider liquidity and cash flow requirements as schemes mature, which means they might have to restructure portfolios to avoid becoming a forced seller of assets.

The £1.8bn scheme told members that over the last year, it had exited a number of investments with a view to simplifying and consolidating its asset allocation.

There's been an emphasis on looking to better align mandates with the fund’s longer-term strategic objectives, specifically their cash flow profile

Alex Lindenberg, Redington

According to the scheme, it “began to gradually wind down our property fund of fund allocations” while “taking care to minimise the transaction costs”. The scheme also redeemed a fund of hedge funds allocation.

“Proceeds from these sales have been invested in our existing diversified growth fund”, the scheme explained, as well as a new buy-and-maintain mandate.

Alex Lindenberg, senior vice president of the investment consulting team at the scheme’s investment adviser Redington, noted that many pension schemes have been “hit quite badly by the falling interest rate environment”.

However, he said the Reuters fund has not been affected thanks to a “decision to hedge their interest rate risk three years ago, which has obviously been very beneficial to the scheme in reducing funding level volatility”.

More liquidity, lower fees

Lindenberg said that in its credit portfolio, the scheme moved from a conventional benchmark-based mandate to a buy-and-maintain mandate because “there’s been an emphasis on looking to better align mandates with the fund’s longer-term strategic objectives, specifically their cash flow profile”.

He added that the scheme’s fund of hedge funds allocation had performed quite well, but noted: “It was felt that the market had moved on a bit since they had initially made that investment, and it would now be possible to access a similar type of strategy but in a more liquid and lower fee format.”

This desire for greater liquidity and lower fees contributed to the scheme’s decision to put some of the proceeds into its diversified growth fund, said Lindenberg.

He added that the trustees’ new focus on “low-cost, transparent, liquid sources of return” rather than more illiquid and complex strategies with higher fees was also the main reason the scheme exited the two property funds of funds, for European and UK property.

Property as an asset class “offers a good and attractive level of income”, said Murray Taylor, senior consultant at JLT Employee Benefits, but he agreed that schemes looking to wind down their property allocations might do so to “make their assets more liquid”, which would tie in with a maturing pension fund’s objectives.

Why buy and maintain?

Calum Cooper, partner and head of trustee consulting at Hymans Robertson, said that buy-and-maintain credit is popular because, “as schemes get more mature, they’re increasingly paying out more in benefits than they’re receiving in contributions, so they need more cash”.

For smaller schemes it is not as straightforward to invest in buy-and-maintain credit, so it will have to be done in “a more pragmatic way”, said Cooper. These pension funds can opt for a “multi-asset credit portfolio, for example”, he said.

Lionel Pernias, global credit portfolio manager and head of buy-and-maintain at Axa Investment Managers, said that “government bond yields are at very low levels”, whereas buy-and-maintain credit can help achieve returns, rather than just match liabilities. He also noted that a buy-and-maintain strategy can be blended with liability-driven investments.

In addition it can give investors access to credit for a lower fee while focusing on long-term returns and not following an index or a formula. Pernias said it is “effectively a hybrid between active and passive”.