RSA scheme targets buy-and-maintain strategy to derisk

Over the past few years, many pension schemes have turned to real assets in the hunt for sustainable returns. But experts have said there is growing demand for buy-and-maintain credit strategies as investors look to match liabilities.

The strategy was first accessed predominantly by insurance companies, but in recent years large pension funds have started to show an interest as well.

One of the biggest advantages of a buy-and maintain-strategy, if it’s done well, is capturing inefficiency which exists because of the advent of benchmarks in credit markets

Shalin Shah, Royal London Asset Management

The circa £4.6bn Sal Pension Fund is one them, having reducing its growth asset allocation to bump up its credit exposure. The overall strategic allocation to credit is moving to 32.5 per cent, up from 22.9 per cent.

“The majority of the money being invested in credit [will be] invested with a greater focus on matching the scheme’s liability cash flows,” states a newsletter to scheme members.

“This is referred to as a ‘buy-and-maintain’ credit portfolio which will be in place during June 2016,” it adds.

Real assets exposure

The fund is also following the real assets trend, with plans to increase investments in infrastructure and real estate to generate long-term cash flows.

“It has been agreed that the scheme’s allocation to secure income alternatives should increase from around 5 per cent to around 10 per cent of total assets, with the increase being funded from gilts,” the scheme said.

The investment strategy changes were agreed following the results of the fund’s 2015 triennial valuation, which revealed increased liabilities and a slightly reduced funding level.

No replacement for LDI

Ian Mills, partner at consultancy LCP, said one of the potential benefits of this type of strategy is that the portfolio can closely match liability cash flows.

Source: RSA Pensions

“The bond portfolio is structured to exactly match those cash flows, meaning that the reinvestment risks or disinvestment risks that pension schemes ordinarily face are reduced,” he said. 

He added that buy-and-maintain strategies also avoid the trading costs that are associated with both actively and passively managed investment-grade credit portfolios.

Despite its matching potential, buy-and-maintain is not necessarily a replacement for liability-driven investing, said Mills. He said many funds blend LDI approaches with buy-and-maintain strategies as part of a package.

“A hammer doesn’t replace a screwdriver – if you want a good toolkit, you need both,” he explained.

“What we often see is a strategy which has buy-and-maintain at the short end and liability-driven investment techniques for the very long-term liabilities,” he added.

Shalin Shah, credit fund manager at Royal London Asset Management, agreed that using buy-and-maintain strategies with LDI is very common, particularly in larger funds. "I expect that to continue," he said.

Shah said a buy-and-maintain strategy can be useful for pension schemes because it allows funds to be unconstrained. “You’re not forced to hold bonds that sit within a typical benchmark,” he said.

“I think one of the biggest advantages [of a buy-and maintain-strategy], if it’s done well, is capturing inefficiency which exists because of the advent of benchmarks in credit markets,” he said.

Growing demand

Shah said that buy-and-maintain strategies have increased in popularity over the last two to three years: “We’ve seen a gradual increase in our own exposures…from funds actively moving to that type of approach.”

Ben Gold, head of investment consulting at Xafinity Consulting in Leeds, also commented on the popularity of the strategy.

“There is definitely a growing demand for buy-and-maintain – indeed I believe this is going to be a core holding for pension schemes in future years,” he said.

But he added that the ability to construct bespoke portfolios tailored to specific liabilities is often the preserve of bigger pension funds.

“However, there are some pooled funds available where they follow a shape suitable for a ‘typical scheme’. I think we’ll see more of these,” he said.

Gold said that if a buy-and-maintain portfolio is structured appropriately, it “can form part of a strategy that enables a scheme to manage risk very effectively”.

But as with all investment options, there are pros and cons. He said that one of the negative aspects relates to “an inability to realistically target higher levels of return, if this is desirable – for example the returns you might expect from equities or diversified growth funds”.