Buck Global Investment Advisors at Xerox Directed Consulting

Transcription

1 Buck Global Investment Advisors at Xerox Directed Consulting

2 Directed Consulting takes a streamlined approach, providing direct and proactive recommendations on asset allocation and investment manager selection.

3 Streamlined and proactive investment advice Investment decision-making can place significant demands on the resources available to trustees of defined benefit pension schemes. Traditional approaches to setting asset allocation policies and selecting investment managers typically include detailed recommendations from advisors on a range of options for trustees to select a preferred approach over the course of several meetings. A new approach Buck Global Investment Advisors (BGIA s) Directed Consulting service at Xerox provides trustees with a streamlined decision-making structure and harnesses the full resources of our investment risk analysis tools, long and medium-term asset allocation models, and investment manager research. Getting started We start with the big picture for asset allocation policy. In an initial meeting with your trustees and in consultation with your sponsor, your investment consultant will work with you to establish a high-level asset allocation policy over a specified Investment Policy Period. The output is a simple summary of your trustees broad approach to asset allocation. We will question: Over what period does the policy apply? What is the preferred measure of funding (ongoing, self-sufficiency, or buy-out) for measuring investment objectives and investment risk? What is the required level of investment return, relative to the chosen funding basis? How much funding level volatility is acceptable now and at the end of the period? With Directed Consulting, trustees maintain control of their schemes investment policy and are able to re-focus their allocation of resources towards high-level investment risk budgeting decisons and timely responses to changing market conditions. This is all conducted within a comprehensive and competitive fee structure.

4 Case study: High-level asset allocation policy A trustee board of a frozen defined benefit pension scheme with a strong covenant sponsor worked with BGIA to agree the following high-level investment policy: The Investment Policy Period is the remaining period of the Recovery Plan: 9 years The trustees and sponsor agree to measure funding level risk on a buy-out basis The buy-out funding level was 68% and the Recovery Plan implies an expected buy-out funding level of 88% after 9 years The Recovery Plan implies an average investment return of 1.5% p.a. in excess of the discount rates underlying the estimated buy-out funding level The trustees and sponsor are averse to experiencing short-term deteriorations of more than 10% in the buy-out funding level The trustees and sponsor wish to see funding level risk reduce to 5% after 9 years Effective long-term asset allocation advice Directed Consulting translates the high level investment policy into target asset allocations throughout the Investment Policy Period. Working with the target funding levels and risk tolerances, we prepare firm recommendations on: The initial mix of growth and risk-reducing investments, and how this mix is expected to develop over the Investment Policy Period Trigger points for switching from growth to risk-reducing assets, when relevant, based on funding level, long-term interest, and inflation rates The composition of the growth and risk-reducing portfolios The trustees meet to discuss our analysis and recommendations, agree modifications, and finalise the asset allocation policy. Decisions are documented in the trustees Statement of Investment Principles. Asset allocation advice comprises initial and final asset distributions in line with the agreed expected returns and risk tolerances. Target asset distributions are reviewed and updated to reflect market conditions on a quarterly basis. Proactive medium-term asset allocation advice We provide you with quarterly updates on medium-term asset allocation so that target asset distributions can be amended to reflect opportunities and threats in different market conditions. We will deliver: An update on market conditions, together with firm recommendations on changes to the target asset distribution, issued within 10 working days of each quarter-end Regular meetings or conference calls with your trustees, or your investment subcommittee, to discuss recommendations and agree changes, within 15 days of the quarter-end

5 Case study continued: Long-term target asset distributions Our long-term asset allocation recommendation included the following target distributions at the outset and end of the Investment Policy Period: Sub-portfolio Asset type Initial allocation Final allocation Growth UK equity 15% 5% Global equity 20% 10% Property 10% 10% Emerging market equity 10% 5% Commodities 10% 0% Total growth 65% 30% Risk-reducing Fixed interest gilts 5% 20% Index-linked gilts 15% 30% Corporate bonds 15% 20% Total risk-reducing 35% 70% Trigger points, referencing their scheme s buy-out funding level and rates of long-term interest and inflation, were agreed so that the transition towards the final allocation will be accelerated if funding levels rise faster than expected, or if interest or inflation rates become more attractive. Recently, our medium-term asset allocation models showed strong signs in favour of corporate bonds versus gilts. The investment sub-committee decided to temporarily increase the target allocation to corporate bonds to 25% and reduce the index-linked gilt allocation to 5%. This position was subsequently reversed, capturing a significant performance gain. Streamlined investment manager selection A key feature of Directed Consulting is the streamlining of decision-making processes for selecting investment managers and funds. Traditional approaches typically comprise detailed reports on a range of possible managers and funds, followed by investment manager selection meetings at which representatives make presentations to your trustees. Within Directed Consulting we recommend a single investment manager for each asset type within the agreed investment policy. It is widely acknowledged that, whilst investment manager selection and monitoring can add value, the proportion of trustees time spent on investment management arrangements is disproportionately high, relative to the time allocated to asset allocation policy. Our Directed Consulting approach provides trustees with access to our best ideas for managers and funds in each asset class, which are regularly updated as our research ratings change. We make firm, single recommendations on fund choices, balancing total investment management fees against prospects for outperformance against agreed benchmarks. Our quarterly advice to you includes updated research and ratings on each existing investment manager, plus recommendations, when necessary, on replacement investment managers and funds.

6 Case study continued: Investment manager recommendations After analysis of correlations between the different managers investment performance, transition costs, and total investment management fees, we proposed the following mix of investment managers and funds to implement the initial asset distribution: Asset type Investment manager Investment style Performance target AMC UK equity A Passive n/a 0.10% Global equity B Active +2.00% 0.60% Property C Active +0.75% 0.50% EM equity D Active +3.00% 0.80% Commodities E Active +2.00% 0.75% Fixed interest gilts A Passive n/a 0.10% Index-linked gilts A Passive n/a 0.10% Corporate bonds F Active +0.75% 0.25% Overall 1.10% 0.40% A comprehensive service Directed Consulting offers the flexibility to adopt and monitor a more sophisticated investment policy, combined with proactive advice on target asset distributions and investment manager changes. After the initial high-level review of asset allocation policy, changes to target asset distributions and investment manager arrangements are considered and agreed by the trustees or an investment sub-committee in quarterly meetings or calls, making effective use of your time. All other aspects of managing your investment policy, including monitoring of investment performance and risk, re-balancing, implementing new investment manager arrangements, and updating documentation, such as the SIP, are undertaken by us, with quarterly summary reporting. Our fees are expressed as a percentage of the value of scheme assets, covering comprehensive investment advice, implementation, training, and monitoring services. This offers a no surprises fee structure. Contact us For more information on our Directed Consulting service, contact: hrconsultinguk@xerox.com Buck Global Investment Advisors is a trading name of Buck Consultants (Administration & Investment) Limited 160 Queen Victoria Street London EC4V 4AN T +44 (0) Registered office: 160 Queen Victoria Street, London EC4V 4AN Registered in England no.: Authorised and regulated by the Financial Conduct Authority 2014 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are registered trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BRP2825