DEVELOP AN INTELLIGENT INVESTMENT STRATEGY
Andrew Linz
Senior Investment Consultant
Having a dynamically evolving investment strategy is key to an efficient and effective journey to your long-term funding target.
During the year we did see a gradual move in investment strategies to increase hedging (relative to pre-Covid times). As illustrated in the chart, we have gone from inflation hedging being on average slightly below interest rate hedging, to the same level. This may be due to trustees keeping a closer watch on inflation risks in the face of rising inflation expectations, and heeding the call we made last year (and will make again this year!) to monitor hedging levels versus targets on a regular basis.
Average hedging level (% of assets)
We have also seen a modest move from return seeking assets into bonds and hedging assets. This is in line with what you'd expect from schemes capitalising on the opportunity to de-risk following strong returns on riskier assets and some periods of (relatively) higher gilt yields. Asset allocations can vary widely by scheme - reflecting their different circumstances.
Asset allocation then and now
Our quick investment strategy health check will help you ensure you remain on track and continue to position your scheme’s assets effectively in the current environment. The seven key actions are set out below.
CHECKLIST OF ACTIONS -INVESTMENT STRATEGY CHECK-IN
1. Make sure your investment strategy reflects your long-term funding target
2. Align your hedging portfolio with your current position
3. Check if inflation hedging needs to be recalibrated, and then do it
4. Make sure you have a plan for de-risking and that it allows for current market conditions
5. Plan how you expect to meet benefit payments
6. Consider improving the efficiency and liquidity of your portfolio
7. Formulate a clear policy on managing climate-related risks
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