The National Grid U.K. Pension Scheme, London, is in derisking mode.
“There is a long-term strategy for the scheme, which is designed to match future liabilities,” said Stuart Waldron, London-based chief operating officer at Aerion Fund Management Ltd., the in-house money management unit that runs 80% of the £15.4 billion ($25.8 billion) defined benefit plan.
“We have been moving 1% of the assets into fixed income from equities each year as part of this strategy. We will retain return-seeking assets for a significant time period — whilst we are a reasonably mature scheme, the time horizon remains long term.”
The fund is closed to new employees and has 120,000 participants, 83% of whom are retirees.
About 58% of the assets are in fixed income, across domestic and international allocations, and 27% are in equities across the U.K. (£1.2 billion) plus allocations to Japanese, North America, European and emerging markets totaling £2.9 billion. “Over the next 20 years or so, those return-seeking assets will be moved gradually to a liability-matching portfolio,” said Paul Sharman, CEO of Aerion.
As the pension fund continues to mature, Aerion is looking at every part of the portfolio for potential drags on performance.
The latest example of that is examination of its currency exposure.
The fund has a significant exposure to overseas equities - currently about £3.5 billion, said Mr. Sharman. Because of those international allocations, the fund has 36 individual currency exposures.
The top five — covering the U.S. dollar, yen, euro, Swiss franc and Australian dollar — account for 87% of the total exposure. The top 10 currencies account for 95% of total currency exposure.
Fifteen months ago, Aerion decided it was time to look at the effect these exposures were having on the value of the plan.
“We started a review of how we managed currency risk,” said Mr. Sharman.
The fund has had a passive hedging strategy in place since 2007, with 50% of currency exposure hedged and 50% unhedged. Being pound sterling-based, the fund historically had passively hedged 50% of its currency exposures back to the home currency. “It is a passive strategy because once the hedge ratio is set, the exposure is mechanically hedged at 50%, and no judgment is made on varying that ratio,” said Mr. Waldron.
Aerion officials decided to analyze historical currency movements and found a dynamic hedging program would have generated significant returns for the fund. So executives looked at their options. “We looked at fundamental overlay, carry trades and other options,” said Mr. Sharman. And then Aerion executives met with people from the money management arm of Berenberg Bank and looked at its quantitative approach to currency overlay.