Royal Mail diversifies alternatives ahead of planned scheme closure

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The Royal Mail Pension Plan has diversified the alternatives investments in its portfolio, adding new private debt and infrastructure funds, while almost eliminating its exposure to equities in one of its sections.

Alternative asset classes have seen a sustained increase in interest from pension funds over the past decade.

The Royal Mail plan increased its overall allocation to alternatives in the year to March 2016, adding new funds in private debt, Asian infrastructure and absolute return strategies.

It also marginally increased its weight in liability-matching assets in both the Royal Mail and Post Office sections, allocating more than 60 per cent of their portfolios to such strategies.

A lot of schemes are relatively small and can’t afford the access point. These things will become commoditised in due course
Richard Butcher, PTL

The fund’s last valuation update in 2014 showed significant surpluses in both sections, but the summer has not been entirely plain sailing for one sponsor.

Thousands of members of the Communication Workers Union working for the Post Office went on strike last Thursday in protest at plans to close the Post Office section of the scheme.

The fund’s investment strategy has yielded more positive results, returning just under target at 3.8 per cent.

The scheme’s annual reports and accounts note: “The increase in the market value of investments during the year was £477m, partially as a consequence of the fall in yields during the year increasing the value of the Plan’s liability-hedging portfolio.”

It continued: “During the year the trustee further diversified its alternative investments, adding new private debt funds... an Asian infrastructure fund... as well as a new absolute return fund managed by HBK Capital Management.”

An alternative to equities

A diverse portfolio of alternatives has traditionally been the preserve of large schemes with the required scale, resource and expertise to acquire illiquid assets.

Pooled arrangements have gone some way to opening the space up to smaller schemes, but, according to David Hickey, managing director in SEI’s EMEA institutional group, neither bespoke strategies nor diversified growth funds are achieving optimal exposures.

“It’s such a broad space that you’ll tend to get one trustee board [of a large scheme] focusing on three or four out of 20 alternatives,” he said.

At the other end of the scale, he said managers of pooled funds can be tempted to add as many sub-classes as possible, regardless of potential for return, to attract business from small schemes looking to tap into diversification.

Hickey also said he was surprised to see the Post Office section of the Royal Mail plan almost eliminating its exposure to equities, at just 2 per cent of the total allocation.

“Equities still have a massive role to play,” he said, emphasising the dividend yield and element of inflation protection. “Fundamentally they’re cheap and there are opportunities.”

But for Richard Butcher, managing director at PTL, Royal Mail’s strategies must be understood in the context of the fund’s £7.6bn of assets.

He said that while most schemes do not have sufficient access to alternatives to satisfy their growth needs, larger schemes will see alternatives as offering additional downside and upside protection, and potentially better returns.

“If you follow the efficient market theory then you’re not going to get growth in the equity market – you’ve got to look elsewhere,” he said.

He also questioned the notion that DGFs are overly diversified. He added that at present few small schemes will be considering significant allocations to assets like infrastructure, but this may change.

“A lot of schemes are relatively small and can’t afford the access point. These things will become commoditised in due course.”