The COVID-19 pandemic and its effects are not slowing down USS Investment Management Ltd.'s fixed-income executives from achieving their aim of more internal money management.
Not only are plans moving ahead, but the pandemic also gave the team the opportunity to execute some huge trades.
USS IM is the in-house manager for the U.K.'s largest private pension fund, Universities Superannuation Scheme, London, which had about £82 billion ($111.3 billion) in assets as of Dec. 31. The majority of assets is held in a defined benefit plan, with the remainder in a defined contribution plan.
The fund is currently the subject of proposals, reviews and commentaries due to a ballooning deficit. On a technical provisions basis, the deficit grew to between £14.9 billion and £17.9 billion as of March 31, 2020, depending on the scenario used to value the shortfall — from £3.6 billion as of March 31, 2018. Current proposals from the pension fund include increasing the level of employer and participant contributions.
Even with potential changes on the horizon, the fixed-income team is marching on with its tasks. "I'm building the team so that we can run a greater proportion of the assets in-house — that's very useful for us as the scheme continues to mature," said Ben Clissold, head of fixed income and treasury in London, in an interview. "We can deliver better value for money for members and better alignment with the long-term challenges we face."
The latest available figures, as of March 31, 2020, show the pension fund's asset allocation was 26.9% index-linked bonds, 11% "other" fixed income, 6.5% nominal government bonds and 2% absolute-return strategies. The rest of the portfolio was invested in public equities (38.4%), other private markets (21.9%), real estate (5.5%) and commodities (1.1%). There is also a 13.3% exposure to cash and overlays.
The team runs about £25 billion — meaning about 75% of total fixed-income assets are managed internally — but that includes a lot of leverage, Mr. Clissold said. That leverage is used for protection from moves in interest rates and inflation — which can of course lead to losses but not when looking relative to USS' liabilities because both move in tandem, Mr. Clissold added. There are also foreign-exchange overlays to manage FX risk in non-sterling assets. Assets run in-house include developed and emerging markets government bonds and credit.
The most recent preparation for more in-house management started with last month's appointment of Janet Oram as USS IM's first head of asset-backed securities.
Current USS allocations to ABS — "an area where we as a team was underrepresented," Mr. Clissold said — are immaterial in public markets and there is only a small private markets exposure. Ms. Oram will build a team but how much they will run is "an open question … like lots of areas of credit, (we) may choose to deploy more or less depending on the relative value between (ABS) and corporate bonds."
Mr. Clissold thinks ABS will bring a lot of investment opportunity going forward and, when he joined 18 months ago, thought it was an area of fixed income that USS IM should be doing more in — particularly since "a large proportion of credit in the U.K. is asset-backed."
There's also no target for the percentage of fixed-income assets that will be run in-house — that depends instead on asset allocation decisions and the growth of the team.
But not all of the fund's fixed-income management will move in-house — Mr. Clissold wants to be smart about it. "The way I envisage that working is there's lots of external managers that do a phenomenal job, and we want to get the best out of them. We're not ever going to have the breadth of knowledge of 100 different external managers — it's just not going to be possible. So we want to make sure we get the best out of those partners and pick those partners very carefully, and make sure we have a good, strong relationships" with them.
As is the direction of travel for most large asset owners, the in-house manager will have fewer external managers but stronger relationships. Mr. Clissold declined to comment further on relationships with external managers.