Railpen talks risks and opportunities in trade upheaval

Amidst managing liquidity and risk levels, investors have also been looking for opportunities to deploy capital into the market. Investment team meetings at Railpen, asset manager for the £34 billion pension scheme for employees of the UK’s railway, have involved rattling a tree and seeing what comes down.

Investing in currencies has landed in the opportunities bucket, as well as long short equity strategies given the emergence of corporate winners and losers as tariffs drag down revenues for some companies more than others.

“Currencies move in this space,” Mads Gosvig, chief officer, fiduciary and investment management tells Top1000funds.com, adding although it’s difficult to see the long-term impact on the dollar’s safe-haven status through the noise “the suppression of the dollar could be one theme [of the Trump administration].”

Longer-term, the team is also exploring whether to have the same reliance on the US in a portfolio that invests around 44 per cent of assets in equities.

“The MSCI benchmark has around a 60 per cent weighting to the US. Is this a good idea or would it be better to skew the weight to other regions? European equity has already outperformed US equity this year,” he says.

In uncertain economic times, he is also increasingly wary of private debt where looser lending standards and a vast amount of capital has flooded in recent years, worrying investors.

Over the past five years, Railpen has gradually built out its interest rate/credit exposure in the portfolio and the externally managed allocation will be rolled out further.

“Some of the returns in private debt are almost just as good as what we have seen in private equity. Investors get the same type of promises in a trend that is being driven by the way managers structure these portfolios and develop the underlying exposure. It is interesting to see how this will develop.”

Yet his enthusiasm is tempered by concerns that private credit which took off after banks retreated from lending post GFC has never experienced a full-blown crisis like 2008. “Private debt remains untested. I think there are probably many private debt providers out there, big and small, that if there was some kind of crisis would fall off,” he says.

In today’s challenging economic climate he is also concerned about long-term growth prospects in the UK where Railpen invests around one third of its assets (£11 billion) across stocks, private equity and infrastructure. Echoing concerns voiced by other large UK investors like £45 billion LGPS pool Border to Coast, he reflects that small and mid market businesses that have proved themselves are struggling to access the capital they need to grow.

“To create growth, capital must flow to where it is most needed. UK and foreign capital is flowing down into the system, but it is still not reaching right down to the lowest level like start- ups that need £5-20 million to capitalize on all their good ideas. We need intermediation on how capital gets to where it is needed most to create a system that is more efficient.”

Client focused approach

Railpen undergoes an actuarial evaluation every three years and is approaching its next one. The process is a chance to adjust the asset allocation and this time around the team are particularly focused on taking down the risk level of some of the well-funded, mature and closed DB pensions in the pool.

“Amongst our client group we have mature, closed defined benefit pensions. They are now well enough funded to take off risk, and we want them to consider moving towards buy-in or buy- out. We are currently adjusting the portfolio to be able to deliver on the needs of this group.”

Meanwhile with the open sections, his focus is on ensuring access to illiquid and liquid growth assets in a process that involves repositioning what it is in the portfolio to deliver to different needs, rather than “buying new things.”

Other focus areas include enhancing efficiency in the liquid multi asset pools that account for around £22 billion, fine tuning FX hedging and rebalancing stratgies, for example.

Elsewhere, he is working on improving processes in public equity. For example, a quant solutions team is exploring new technology. “They are working on different ways to apply newer tech. It’s not as sophisticated as AI, but we are running models and improving and enhancing our quant processes.”