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David Curtis, Head of UK Institutional Business, Goldman Sachs Asset Management: “Record lows in gilt yields have pushed deficits to all-time highs. We encourage trustees to take a closer look at all elements of their strategy to ensure that both risks are managed and market opportunities are captured. |
“The biggest determinants of how individual schemes have performed are their liability hedge ratio, degree of home bias in their equity allocation and currency hedging. Many schemes still have significant interest rate and inflation risk, meaning asset growth has significantly lagged liability growth. In addition, many schemes have a home bias towards domestic equities. Those schemes with a more balanced global equity portfolio would have outperformed particularly where the currency risk is less than fully hedged. It is notable that smaller pension schemes typically have lower hedge ratios and higher home bias and therefore may have lagged the aggregate picture. “We expect to see an accelerated trend towards enhancement of governance in light of growing deficits and a challenging investment environment, including more schemes utilising Fiduciary Management. “For our clients, the most important aspect in the run-up to the referendum was having the strategy right in the first place, which means hedging a meaningful portion of the liabilities and having a well-diversified portfolio across regions and asset classes. Where clients were not at their strategic position, we sped up the increase in their liability hedge ratio due to expected (and then experienced) volatility both before and after the referendum and additionally took appropriately sized tactical positions to capture value.” |
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