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Nilgosc


Investment Strategy

Investment Aims and Objectives

NILGOSC aims to invest the assets of the Scheme prudently to ensure that the benefits promised to members are provided, and to provide reasonable stability in contribution rates for the employers. To meet this aim NILGOSC's overall investment objective is to exceed price inflation and general salary growth over long term periods.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. The annual percentage change in CPI is used as a measure of inflation and to index (i.e. 47 adjust for the effect of inflation) the real value of wages, salaries and pensions to show changes in real values. NILGOSC’s actuarial valuation as at 31 March 2019 assumes a prudent investment return of 4.1% for the main group of employers, which is equivalent to CPI +2.1%. NILGOSC’s overall investment target changed on 1 April 2018 in line with the new investment strategy adopted. From that date the overall investment target is to exceed CPI by 3.5% per annum, to be measured over three and five year periods.

Each fund manager has been set an individual performance target using indices applicable to the asset type and geographic market. The Committee monitors the performance of its investment managers by availing of Northern Trust’s performance measurement and reporting facility.


Investment Strategy 

NILGOSC sets its long-term investment strategy by taking into account the nature and timing of the Fund’s liabilities identified through the triennial actuarial valuation and its investment aims and objectives. In setting the Fund’s investment strategy, NILGOSC first considers the lowest risk strategy that it could adopt in relation to the Scheme's liabilities. The investment strategy is designed to achieve a higher return than the lowest risk strategy while maintaining a prudent approach to meeting the Scheme’s liabilities.

These considerations drive decisions over asset allocation.  NILGOSC reviews the Fund’s asset allocation every three years. In determining its asset allocation, NILGOSC considers:

  •  A full range of asset classes
  •  The risks and rewards of a range of asset allocation strategies
  •  The suitability of each asset class
  •  The need for appropriate diversification

The Fund's investments are diversified across various asset classes in order to increase the overall expected returns while reducing the overall level of risk.  A mixture of passive and active mandates are also used to capture the returns required to meet the Fund's objectives.

The latest formal strategic review took place in October 2017 and culminated in a revised investment objective and asset allocation. The review was informed by the improved funding position identified by the 2016 valuation, together with advice from the investment advisor and scheme actuary on future investment and demographic expectations. The new investment objective has been effective since 1 April 2018 and a transition plan is underway which aims to implement all remaining asset allocation changes by the end of 2020. The revised strategy has reduced the proportion of the Fund invested in equities from over two-thirds to just over one-third and is reweighting the Fund towards fixed income going forward, as NILGOSC seeks to reduce investment risk as the Fund slowly matures. The reweighting of the Fund also led to a review of NILGOSC’s overall investment objective, which from 1 April 2018 was changed from CPI+5% to CPI+3.5%.

The first phase of the transition successfully completed in March 2018, with £827.8m transferred from active UK equity mandates to fund an increase in passive index linked gilts managed by Legal & General. This included termination of the BlackRock Global Equity mandate in February 2018. The second phase of the transition took place during 2018/19, with 3 further active mandates terminated and 2 mandates reduced in order to fund the 4 new specialist Fixed Income investment managers with £2.2bn in March 2019. The 4 new mandates were funded on 22 March 2019 and performance management commenced on 1 April 2019. The 4 new mandates are Royal London Asset Management (RLAM) Absolute Return Government Bond Portfolio, T. Rowe Price Dynamic Global Bond Fund, BlueBay Total Return Diversified Credit and PIMCO Multi Asset Credit Mandate. The third phase of the transition was the appointment of a new investment manager, CBRE GIP, in February 2020 to manage a c.£250m Global Property mandate. This mandate was not funded at 31 March 2020 and will be gradually funded over 12-18 months as suitable opportunities arise. The final phase of the transition will be the appointment of a specialised Emerging Market Equity manager to manage a mandate of c. £200m. This appointment will take place before the end of 2020. This appointment combined with further investment in infrastructure will reduce equity holdings to c.34% of the total fund.

The standard targets and benchmark indices for each asset class held by the fund as at 31 March 2020 are shown in the following table:

Asset Class

Target/ Benchmark Indices

(Outperformance shown per annum)

UK Equities

 

FTSE All Share + 2% 

Overseas Equities

MSCI All Countries World + 3%

FTSE All World Index + 3%

FTSE All World North America Index

FTSE North America GBP Hedged

FTSE All World Developed Europe ex UK Index

FTSE All World Developed Europe ex UK Index hedged

FTSE Japan Sterling hedged

FTSE All World Developed Asia Pacific ex Japan

FTSE All World All Emerging

Cash

 

Cash LIBID 7-Day

Bonds

Index Linked Gilts

 

 

Absolute Return Bonds
 
 

 

 
Multi Asset Credit

 


FTSE Actuaries UK Index-Linked Gilts Over 5 Years Index


 

Sterling Overnight Index Average (SONIA) +2.5%

3 month GBP LIBOR + 3%

 


Merrill Lynch British Pound LIBOR 1-month Constant Maturity Index + 5%**

To outperform the below composite benchmark by 2.5%:
33% JP Morgan EMBI Global (GBP hedged);
33% Bloomberg Barclays Global Aggregate Credit Index Ex Emerging Markets (GBP hedged); and
33% BofA Merrill Lynch BB/B Rated Developed Markets High Yield Constrained Index (GBP hedged)

 

Property

Index Linked Property

 

Traditional Property

 

Global Property* 

 

Private Rented Sector

 


RPI +3% 

  

MSCI UK Quarterly Property Index + 1%

 

Absolute Return of 5-7% 

 

7% Absolute Return

 

Infrastructure

Infrastructure 


CPI + 3.5%


* This mandate was implemented in February 2020 but was not funded before 31 March 2020.