Telereal dumps gilts for EMD in hunt for performance

The Telereal Trillium scheme has almost no gilts in its portfolio, down from an allocation as high as 20% in one of its two schemes two years ago.

At the same time as reducing its gilt exposure, it has also made a new and substantial allocation to emerging market debt (EMD).

Ben Shaw, pensions manager at Telereal Trillium, was sceptical about gilts, claiming they would “fundamentally underperform your benchmark”.

The answer, he said, was to take some kind of risk. “The problem is finding the appropriate risk,” he added. “One is EMD.”

Shaw said the expected fundamental yield was around 6%, while a couple of percent a year each could be added for currency appreciation, yield compression and manager outperformance.

“Add all those together and you get 12%, so I think shooting for high single digits is probably appropriate,” he said.

How EMD has performed

Until the end of July, the emerging market allocation was giving a return of around 5%.

“Everything took a hit in August and September, but now it’s about flat for the year,” said Shaw. “The yields have widened as with lots of peripheral debt, but eventually it will come back. Emerging markets are fundamentally strong.”

Telereal Trillium’s allocation is about 15% of the portfolio in one of its schemes and 7%-8% in the other.

“Our philosophy was not to sell gilts and buy emerging market debt per se,” said Shaw. “There were two different policies: one to sell gilts and the other to buy EMD.”

He said the scheme’s investment subcommittee proposed the move to the trustees and with their approval sought the view of its investment consultancy.

“We took their comments into account and presented our trustees with a redrafted paper,” he said.

The portfolio change was relatively simple. “We bought a local currency EMD fund,” he said. “Just the one; to be honest there are not many around.

“It wasn’t a process of moving from gilts to cash and then into EMD; it was straight from gilts into EMD. We did it in about a week.”

Shaw said other pension schemes were realising they may have an overexposure to gilts.

There had been a shift towards considering EMD and currency markets as financially healthier than those in the developed world.

Other schemes' approaches

An increasing number of schemes view them as having a better economic growth outlook and offering better yields than the traditional markets of the UK, US, Europe and Japan.

But most UK pension funds continue to hold the traditional view of traditional markets offering the most security.

However, one pension fund manager, who did not wish to be identified, suggested contagion risk fears mean pension funds should explore other options.

He said corporate bonds issued by companies with extremely good balance sheets may be deemed stronger than government-backed bonds at this time.

“There are no guaranteed investments,” he said. “Even cash has an element of risk.

“The core issue in the past on UK government-backed bonds was a government could not default. Well, this volatile marketplace shows, ultimately, yes it can.”

But Chris Baker, head of fixed Income at BAE Systems Pension Funds Investment Management, felt volatility was not necessarily a problem.

“Everybody is looking at the asset side because that’s what’s been so volatile recently,” he said.

“But if you calculate your liabilities using the same input – gilt yields – then as gilt rates rise your liabilities will fall."