14.03.2024
We recently responded to the Department for Work and Pensions’ Call for Evidence on options for DB schemes following the Chancellor’s Mansion House speech.
In our response, we said that our investment strategy was an example of what could be achieved with a well-diversified portfolio, and that around 30% of our total assets are allocated to productive finance.
In this blog, our Chief Investment Officer, Barry Kenneth, explains a bit more about our investment approach.
Our investment strategy is always evolving
It's long been a feature of our investment strategy that we invest for growth over the long term, and our investment strategy evolves to suit the needs of the PPF and our members.
If you’ve dipped into our recent corporate publications, you’ll possibly have spotted that last September, we reviewed our Strategic Asset Allocation and as a result, established a new investment framework. But if not, all you really need to know is that we split our portfolio into two.
The first portfolio is our Matching portfolio, which has been structured to maintain security of payments to our current members and match how those payments will change over time; it invests largely in gilts and other assets producing investment grade cashflows.
And our second is our Growth portfolio. This has been structured to grow reserves conservatively over the long term, and that means we can use it to invest in assets that have a higher amount of risk – namely productive finance assets.
‘Productive finance’ investments support the economy
Until the Chancellor’s Mansion House speech in July, not many outside the financial world had heard the phrase ‘productive finance’. And even within the financial world, it’s fair to say that there isn’t an absolutely fixed definition of what productive finance assets are, and you’ll get a different answer depending on whom you talk to.
But to my mind, and from the PPF’s perspective, productive finance assets are Equity (both Public and Private), and Real Assets (which includes Real Estate, Infrastructure, and Timberland and Farmland). They are investments which help support businesses and the wider economy.
We also invest heavily in the Debt of Infrastructure, Debt of Real Estate and Debt of general UK Corporate Businesses. However, in the cleanest classification of productive finance, we exclude these transactions from our numbers.
30% of our total assets are allocated to productive finance assets
Using our Growth portfolio, we’ve been able to allocate around 30% of our total assets to productive finance assets. Of that 30%, 52% are in real assets, and 48% in equity.
There is of course another way to split the 30% – what’s invested in the UK, and what’s invested elsewhere – and it’s an important point if you remember that the Chancellor’s call was to increase productive finance investment in the UK.
Around 20% (of this 30%) are invested in the UK (15% in real assets, 5% in equity). Whereas most pension schemes, especially small ones, tend to invest in global funds, which typically have a UK component of around 3 per cent.
I should stress at this point that our asset allocation and risk levels are monitored in real time, and we can adjust our exposures as we need to, to make sure that risks are maintained within our strategic risk budget at all times. That’s why the percentages above are given as ‘around’, because they will fluctuate.
Our investment in productive finance assets is long-standing
Of course, our investment in productive finance assets didn’t start with the advent of our Growth portfolio. A few examples:
- The Thames Tideway Tunnel
In August 2015 we became part of a consortium investing £4.2 billion into the building of London’s new 25km super-sewer, the Thames Tideway Tunnel.
The super-sewer will intercept sewage overflows that would have been dumped into the River Thames and pump them away for treatment. Construction is largely complete and is now in testing ahead of operation in 2025.
- Cross London Trains
In 2020 we acquired a share in the UK’s largest single train fleet, Cross London Trains (XLT). XLT is part of Thameslink passenger rail franchise, which covers the most critical North-South London commuter rail corridor, making it a key transport infrastructure asset in London.
- Sustainable forestry assets
Our investment in soft and hardwood forestry hit a milestone of £1 billion in 2021/22, with key sustainable forestry assets across Australia, New Zealand, the USA, the UK, Ireland, the Baltics, and the Nordics.
- Riverside Energy from Waste (EfW)
We’re a shareholder of the Riverside Energy from Waste (EfW) plant in Kent. EfW diverts non-recyclable waste from landfill and uses it to generate electricity.
A £900m expansion project will bring annual capacity up to 1.5m tonnes of non-recyclable waste by 2026, saving up to 300,000 tonnes of CO2 each year in comparison to landfilling.
The plant plans to be one of the first in the UK to invest in carbon capture and storage technology, which will capture c.90% of its emissions and has been designated by the government as a Nationally Significant Infrastructure Project.
- BES Group
An example of our current investment into UK Private Equity is the carve out of BES Group from the Engineering Inspection & Consultancy division RSA Plc.
Our General Partner led the transaction, growing the standalone business operating profitability by 40% per year, supporting further growth with additional equity investment.
The company drives health and safety in the built environment and now employs over 1000 highly trained Engineer Surveyors and Consultant Engineers.
Our General Partner led the transaction, growing the standalone business operating profitability by 40% per year, supporting further growth with additional equity investment.
The company drives health and safety in the built environment and now employs over 1000 highly trained Engineer Surveyors and Consultant Engineers.
We're a good illustration of what could be achieved
In summary, we’re investing for value over the medium to long term in the full range of asset classes, with significantly higher allocations than many defined benefit schemes to productive finance categories. And I believe we’re a good illustration of what could be achieved in this arena, with the right objectives, scale, and professional asset management.
