RPMI RailPen is turning its attention to fixed income in the latest move to take greater control of costs and investment decision-making in the £21 billion ($32.1 billion) Railways Pension Scheme, London.
Work on equities and some alternative assets has been completed, but with investment returns globally likely to remain constrained and interest rates stubbornly low, the pension fund's leadership determined that changes in investment strategy and the management of assets was necessary.
With an ambitious target for the growth part of its asset allocation pegged to the retail price index plus four percentage points, the pension fund needs risk in its portfolio. But RPMI executives also want a good handle on exposures and investment decisions, and that has meant internalizing control and investment allocation decision-making. “If it goes wrong, it's our fault,” said Craig Heron, investment manager at RPMI RailPen, the in-house manager for the Railways plan, in London. “We know what (the portfolio) should look like, and what it does look like.”
As Pensions & Investments went to press, RPMI was in the process of completing its latest internalization project: moving management of the approximately £2 billion government bond portfolio in-house. Previously run by two external money managers that were not identified, the move is probably one of the most significant changes executives have made in the past six months.
“The government bond fund we will run internally in a very straightforward way. We are basically going to own gilts,” said Mr. Heron.
It was a classic case of “It's not you, it's us,” said Mr. Heron, with a rationale that even the incumbent money managers could not discredit. With yields compressed across fixed income, holding a portfolio of gilts rather than a government bond fund that needed managing and hedging back to sterling makes sense. “We are not sacrificing anything in yield, credit quality and currency. And it means we don't have to govern external managers, we don't have to pay fees. The cost saving, given where equities are at moment, is quite significant,” he said.
But executives are willing to be flexible. “That is what it is now; should the world change, we will change,” said Mr. Heron. While he doesn't see a move back to an active government bond fund managed against an index, “if it turned out that being fixed to the U.K. gilt market is not a great thing for shareholders, we would adapt. We would be foolish to say "This is it.'”