Passive equities and bonds

Passive equities

These portfolios comprise passive UK equities, passive developed equities, and passive emerging market equities.

Objective: To provide exposure to relevant benchmarks via a low cost and highly liquid approach.

Approach: The portfolios will invest passively in the securities underlying the relative market.

Managers may achieve small out performance through the timing of transactions to maintain consistency with the index. The aim is to provide long-term growth, with income re-invested in the portfolio.

Passive bonds

The Passive Bonds portfolios comprise Passive Index Linked Gilts and Leveraged Index Linked Gilts.

Objective: To provide exposure to relevant benchmarks in a low cost and highly liquid approach.

Approach: The portfolios will invest passively in the securities underlying the relative market.

Managers may achieve small out performance through the timing of transactions to maintain consistency with the index. The aim is to provide long term growth, with all income re-invested in the portfolio.

Passive low carbon equities

Objectives: To provide exposure to equity returns and the global economy with lower exposure to carbon emissions and fossil fuels, while still low cost and liquid.

Approach: Climate change is significant long-term risk to investments. This portfolio seeks to mitigate this risk by investing in accordance with a low carbon index which aims for a reduced exposure to carbon emissions by c. 80% and fossil fuel reserves by circa 90% (relative to the standard MSCI World index). The portfolio is designed to closely track (c.30 bps tracking error) the MSCI World Index limiting non-carbon risks to the portfolio.

Passive smart beta equities

Objective: To provide exposure to equity markets and a combination of smart beta factors with the aim of outperforming the comparable market cap index for a low fee.

Approach: The portfolio will invest passively in equities via alternative indices (i.e. not solely focused on market capitalisation).  Significant investment research points to the persistence of factors or styles able deliver excess long-term returns, such as value, small size and low volatility. This portfolio will seek to capitalise on these factors.  The portfolio will be managed on a passive basis for low cost, but the manager may achieve a small out performance against the underlying smart beta indices through the timing of transactions to maintain consistency with the index.

Active equities

The active equities portfolios comprise UK equities, core global equities, high alpha developed equities, low volatility global equities, sustainable global, smaller companies equities and emerging market equities.

UK equities

Objectives: To provide exposure to UK equities, together with enhanced returns from manager skill.

Approach: Investing in the UK equity market avoids direct currency risk, benefits from the high standards of governance and transparency in the UK, and provides access to a wide range of companies with UK and global exposure. However, the market is somewhat imbalanced from a sector perspective and concentrated in a relatively small number of leading names. These aspects of the UK market create opportunities for skilled managers to add long term value through better portfolio construction and stock selection. Managers may invest in an “unconstrained” fashion paying little or no attention to the benchmark constituents or weights.

Core global equities

Objectives: To provide global equity market exposure and some excess returns from manager skill, with moderate fees and reasonable liquidity.

Approach: The portfolio will use active management to achieve the performance target in a risk-controlled manner.

High alpha developed equities

Objectives: To provide global equity market exposure together with excess returns from accessing leading managers.  It will comprise global equities (primarily developed), diversified by sector and geography.

Approach: The overall portfolio may exhibit material style biases. Positive style exposures, will generally be preferred and a material tilt overall away from quality or low volatility would be a concern. Style exposure will be monitored and managed by Brunel.

Low volatility global equities

Objective:  To provide exposure to global equities in a way which seeks to moderate the expected high levels of risk in equities without reducing long term returns, through exposure to the low volatility factor and manager skill, at moderate cost with reasonable liquidity.

Approach: It will consist of a diversified range of global equities and should achieve its low volatility objective largely through portfolio construction and stock selection, rather than e.g. trading or option overlays.

Sustainable equities

Objectives: To provide exposure to the global sustainable equities market, including excess returns from manager skill and ESG considerations.

Approach: The sustainable equities portfolio will use a broader strategy consideration of environmental and social sustainability to identify companies and investment themes able to succeed long term through contributing to society. It will build on but go beyond our active approach to corporate governance, and consideration of environmental and social factors, particularly when they represent potential risks to investor capital.

Smaller companies

Objectives: To provide exposure to global smaller company equities together with excess returns from manager skill.

Approach: Smaller companies will be as defined by the relevant index provider. Some investment in medium sized stocks will be permitted, as will in non-benchmark smaller companies. The smaller companies effect is well established and demonstrates that smaller companies offer higher long-term returns. It may reflect higher risk, and also the practical issues of investing in smaller companies. Mandates are likely to be quite focused.

Emerging market equities

Objectives: To provide exposure to emerging market equities, together with excess returns and enhance risk control.

Approach: Emerging and frontier economies typically are expected to achieve higher long-term growth rates than developed economies, and, in many cases, are seeing the emergence of a middle class, rising education and improving institutions and infrastructure. Information and market inefficiencies with emerging markets should create opportunities for active managers. Opportunities can arise at both a macro and micro (company) level. Good managers, however, also need to be able to manage the increased risk and challenges of emerging markets.

Fixed interest

The fixed interest portfolios comprise sterling corporate bonds, global bonds and multi asset credit.

Sterling Corporate Bonds

Objectives: To provide some return over gilts by exploiting the credit risk premium: the fact that credit spreads are generally more than adequate compensation for default risks.

Approach: An active approach with enhanced credit analysis and sensible portfolio construction should provide additional returns over the benchmark. Some exposure to unrated and non-benchmark bonds will allow further return enhancements. The portfolios are expected to be highly diverse with >250 holdings). This is because with bonds, risks are asymmetric and so diversification reduces risks without limiting return.

Global Bonds

Objectives: To provide exposure to global bond markets and credit markets, with additional returns from manager skill.

Approach: Assets will be denominated in a range of currencies, but the portfolio will be hedged to GBP. The portfolio will be actively managed – with a wide range of available markets the managers are expected to exploit relative value opportunities around the world. Although managers will be allowed reasonably flexibility, controls will limit overall interest rate and credit exposures.

Multi asset credit

Objectives: To gain exposure to a diversified portfolio of enhanced credit opportunities with modest exposure to interest rate risk.

Approach: The portfolio will invest in a variety of specialist bond sectors, such as corporate bonds, high yield, bank loans, emerging market debt etc. The intention is to gain exposure to range of more specialised, higher return bond sectors which individually do not merit explicit allocation, but collectively provide a diversifying, moderately high return portfolio.

Liquid alternatives

The liquid alternatives portfolios comprise diversified growth funds and hedge funds.

Diversified growth funds

Objectives: To invest in a diversified range of asset classes to provide a broad exposure to a range of return drivers and achieve equity like returns with reduced volatility over a 5-year period. The portfolio will seek to provide diversification from equity risk.

Approach: The portfolio will comprise multi-asset funds which allocate between a wide range of asset classes including equity and fixed income, together with alternative strategies such as real estate, commodities and currency. The portfolio will be actively managed to achieve growth at low absolute risk. Investments will be diversified between asset classes and by geography.

Hedge Funds

Objectives: To provide exposure to a portfolio of leading hedge funds capable of delivering reasonable returns through manager skill with moderate risk and largely uncorrelated to bonds and equity.

Approach: Hedge funds comprise a wide range of investment strategies, which seek to generate returns through manger skill in range of different ways, generally with limited correlation to market risk. Skilful managers can add value through continuing thought leadership and innovation, so the right mechanism to access the best funds will be important. A degree of diversification is also important.  Costs are a key challenge with hedge funds, and will need to be managed carefully, with a focus on transparency as much as possible.

Private markets

The private market portfolios comprise property, infrastructure, secured income, private debt and private equity.

Property

Objectives: To provide exposure to a portfolio of property investments, offering reasonable returns from a combination of income and capital with some diversification from equities.

Approach: Property is one of the most established of the investment classes and provides some diversification from equity and bond markets, although returns and valuations are somewhat dependent of economic growth. The portfolio will predominantly invest in UK commercial property, but may provide some diversification by investing up to 30% in overseas commercial property and/or UK residential property. The portfolio will be actively managed to achieve the fund objective.

Infrastructure

Objectives: To provide exposure to a portfolio of infrastructure investments, generating long term, relatively predictable returns, from a combination of capital and income.

Approach: The portfolio will invest in a range of assets with a skew towards renewable technologies and sustainable infrastructure. Investments in economic and social infrastructure funds capable of achieving the performance target may also be targeted.

Secured income

Objectives: To provide a higher yield than index-linked gilts and corporate bonds with added benefit of this yield rising with inflation or being subject to fixed uplifts over time.

Approach: The portfolio will invest in infrastructure and property assets, primarily through direct funds but some direct investment may be considered. The focus will be on investments with asset backing, contractually fixed or otherwise secure cash flows (with some inflation linking), and limited economic or operating exposure. This could include long lease property and mature infrastructure. Investment will be made in relatively lower risk equity (e.g. without excessive leverage), or in long dated debt instruments (largely private direct lending) Thus

Private debt

Objectives: To provide exposure to a portfolio of private debt instruments, offering reasonably attractive returns, primarily in the form of income, based on credit risks and the illiquidity premium.

Approach: The portfolio will comprise a diversified set of private debt investments, aimed at providing moderately high returns primarily through income.

Private equity

Objectives: To provide exposure to a portfolio of private equity investments, offering potentially exceptional net returns, albeit with high risk, illiquidity and high costs. Impact investment will be considered, subject to meeting the return objective.

Approach: Investments will include a mix of Private Equity investment strategies (Co-Investment, Secondary and Primary funds) and stages (including but not limited to ‘Buyout’, Growth’, ‘Venture’ and ‘Turnaround’).

The portfolio will be global in outlook in search of a diversified set of opportunities, with an average lifecycle of 10 – 15 years.  New opportunity sets will be identified at least annually.  The aim is to provide significant capital growth for the investor with funds returned over the lifecycle of the investments. Currency is unlikely to be hedged.

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