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 strategic 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 most recent formal strategic review concluded in September 2021 and resulted in a revised investment objective for the Fund. The review was informed by the funding position, alongside advice from the Investment Advisor and Scheme Actuary on future capital market and demographic expectations. NILGOSC is a long-term investor and makes long-term strategic decisions, rather than short-term tactical decisions. Therefore, the focus of the 2021 review was to pause, take stock and review the existing strategy, to determine if it continued to be appropriate for the Fund. The review concluded that the strategy adopted in 2017 remained appropriate and that further action was required to bring the Fund in line with the agreed asset allocations.
As part of the 2021 review, NILGOSC, along with its investment advisor established that due to changes in the outlook for various asset classes, the existing target of CPI+3.5% was no longer achievable over the long-term whilst maintaining the same level of risk. To reflect the more muted outlook for investment returns going forward, the overall investment objective was lowered from CPI+3.5% to CPI+3.0%, effective from 1 January 2022.
The allocations to equity, property, fixed income and infrastructure did not change as a result of the 2021 review, but further action is required to implement the strategy in full. Reducing equity holdings to the strategic allocation of 34% of the Fund, whilst simultaneously increasing the Fund’s exposure to real assets remains a key focus. The 2021 review also addressed further integrating environmental, social and governance (ESG) views into the strategy, as well as taking steps to mitigate climate risk in the Fund. In order to help build up the Fund’s infrastructure allocation to the target of 7.5% in May 2022, NILGOSC committed $100m to iCON Infrastructure Fund VI, a closed-ended fund with a focus on diversified brownfield infrastructure assets primarily in Europe and North America. Shortly after, in July 2022, a €100m commitment was made to DIF VII, a close-ended infrastructure fund with a focus on regulated assets, renewable energy and social infrastructure. September 2022 ended with a commitment of €75m to Antin Infrastructure Fund V, which, like the predecessor flagship Antin funds, is close-ended and focused on value-add infrastructure assets in sectors with strong inflation-linked cashflows. At the end of February 2023, NILGOSC also committed $20m to a co-investment in a renewables asset, managed by DIF Capital Partners. Close-ended funds have a number of years over which to draw down committed capital as the infrastructure managers build up investments in each portfolio, therefore there can be a lag between committing to funds, and asset allocation increasing significantly. However, over the period, NILGOSC’s £100m commitment to IFM Global Infrastructure Fund made in March 2022, which is open-ended, was drawn in full. The IFM fund invests in core infrastructure assets globally.
The remaining steps to implement the strategy, include: the appointment of a third global equity manager; the appointment of a second global property manager; consideration of the need to appoint a second Private Rental Sector (PRS) manager; further rebalancing exercises as required; and additional commitments to infrastructure funds. During 2022/23, the processes to identify a suitable global equity manager and a suitable global property manager completed with due diligence and contract negotiations ongoing at the year end.
The standard targets and benchmark indices for each asset class held by the fund as at 31 March 2023 are shown in the following table:
| Asset Class | Target/Benchmark Indices (Outperformance shown per annum) |
|---|---|
| Global Equities | MSCI All Countries World Index + 3% FTSE All World Index + 3% MSCI Emerging Markets Index + 3% Solactive L&G Low Carbon Transition Developed Markets GBP Index Solactive L&G Low Carbon Transition Developed Markets Index – GBP Hedged |
| Cash | Sterling Overnight Index Average (SONIA) |
| Fixed Income Index Linked Gilts | FTSE Actuaries UK Index-Linked Gilts Over 5 Years Index |
| Fixed Income Absolute Return Bonds | Sterling Overnight Index Average (SONIA) +2.5% 3 month Sterling Overnight Index Average (SONIA) + 3% |
| Fixed Income Multi Asset Credit | ICE BofA SONIA 1-Month Constant Maturity Index + 5% To outperform the below composite benchmark by 1.25%: 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 | Retail Price Index (RPI) + 2% |
| Property Traditional Property | MSCI Quarterly Universe Index + 0.5% |
| Property Global Property | Absolute Return of 5-7% |
| Property Private Rented Sector | 6% Absolute Return |
| Infrastructure | CPI + 3.0% |
*Source ICE data indices, LLC (“ICE data”), is used with permission. ICE® is a registered trademark of ICE data or its affiliates and BOFA® is a registered trademark of Bank of America corporation licensed by Bank of America corporation and its affiliates (“BOFA”) and may not be used without BOFA’s prior written approval. ICE data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE data, its affiliates nor their respective third party suppliers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. ICE data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend NILGOSC, or any of its products or services.
**Other indices were applicable during the period under review but did not relate to the mandates in place at 31 March 2023