Globalisation creates winners and losers, but in recent decades those that have been disadvantaged by globalisation have largely been ignored. It is now widely recognised that the majority of US households have experienced falling real incomes over the last 10 years, and we know that the income distribution has become increasingly skewed towards the richest in society. The Occupy movement in 2011 and Thomas Piketty’s Capital in the Twenty-First Century, published in 2013, were two important catalysts for raising the public discussion on inequality.

This is fundamentally important because high levels of income inequality damage the wellbeing of societies. As one of the biggest challenges to social cohesion, income inequality has a large impact on measures of health and wellbeing.

Globalisation also unleashes powerful financial forces. For example, the emergence of China as an important part of the world economy had the effect of exporting deflation to the developed world, contributing to lower interest rates, lower wages, substantial debt accumulation and, eventually, the financial crisis.

Furthermore, under globalisation, multinational corporations have gained power at the expense of sovereign governments. They have exploited advantages of scale on a global stage, permitting tax avoidance and indirectly affecting the ability of nations to educate their people and maintain infrastructure.

Successive waves of technological advances, accelerated by international trade, have brought substantial benefits, but also rendered many jobs redundant. Today, the rapid development of artificial intelligence raises at least the possibility of mass unemployment in the decades ahead.

Much can be done to curb the excesses of globalisation while still harnessing its benefits and this may be our best hope of averting a more disruptive populist backlash.

Policy changes in each of the following areas could bring some much-needed moderation:

  • Democracy: Politicians will need to be more attuned to the needs and grievances of their constituents and be more flexible when responding to challenges to the status quo.
  • Education: Politicians will need to rethink education systems for a world in which technological developments rapidly change the skills required for individuals to prosper in the workplace.
  • Regulation: Ten years after the financial crisis, some are already calling for deregulation. History suggests that effective regulation of the financial system is an essential contributor to economic stability.

The above doesn’t amount to a dismantling of globalisation. Rather, it is a call for politicians to consider seriously policies that might help relieve some of the resentment that has built up after decades of neoliberal policies.

The case against rethinking globalisation

Certainly the world faces economic and political challenges. However, globalisation is being used as a convenient scapegoat by populist politicians. It is not the source of our problems but a force for good.

A historical view shows a doubling of global trade relative to GDP (a measure of the extent of globalisation) between 1870 and 1913. Between the two world wars, we had a period of de-globalisation – and the Great Depression.

The historical evidence suggests that inter-country trade reduces political tensions and lessens the likelihood of major wars.

Moreover, globalisation has done great good by elevating living standards for many of the poorest in the world. The World Bank states that, since 1850, the rate of global poverty has dropped from 83 per cent of the world’s population to 11 per cent. Meanwhile, life expectancy has doubled in many countries.

Technology, not global trade, is the main cause of job losses in developed countries. For example, participation in the US job market has dropped over the past 50 years for people with less education. This decline took place steadily throughout the period, even though global trade has picked up significantly only during the last 25 years. It follows that globalisation is not the primary cause of those job losses.

The imposition of tariffs, and especially trade wars, would exacerbate inequality and reduce growth. The most vulnerable populations would suffer the most, as those on low-incomes typically rely most heavily on cheap imports to meet their needs. Also, curbs on immigration tend to come with increased persecution of minorities. Overall, the result would be greater levels of inequality and lower global growth.

Implications for investors

Whether the world ends up taking steps to mitigate globalisation’s deleterious effects, or globalisation continues on its current course, there are several prescriptions investors can take to safeguard their portfolios in an environment of heightened political uncertainty:

  • Diversify: While diversification is always wise, uncertain times make it even more important to ensure that portfolios are diversified at an asset class, region and individual security level.
  • Prepare for inflation: Following decades of relatively low and stable inflation across the developed world, investors may need to adjust to an environment in which inflation is once again a risk to portfolios.
  • Prepare for volatility: The potential for trade wars creates the risk of a more volatile and much less benign backdrop for equity markets. Stress testing and scenario analysis will be valuable tools in assessing risk exposures.
  • Be flexible: When markets and policies change significantly, investors with a more dynamic approach will be better able to respond to emerging risks and potential opportunities.

 

Phil Edwards is head of research, Europe, at Mercer.

 

We are seeing strong leadership by members of the European Union and the launch in many other countries of initiatives that champion sustainable investment practices and pay heed to pressing social and environmental issues. The need for this drive is clear, given that Europe alone needs about $215 billion in additional investment each year to keep the dangerous rise in global temperatures below 2 degrees.

More and more countries have started to fly the flag for responsible investment through their policy endeavours. Indeed, the Principles for Responsible Investment (PRI) has identified about 300 instruments that support investors considering long-term value drivers including ESG factors. More than half of these were created between 2013 and 2016.

It has been just over a year since China issued guidelines for establishing a financial system that mobilises and incentivises private capital to invest in green sectors, while also restricting investment in those that pollute the environment. Meanwhile, France’s Article 173, the Energy Transition for Green Growth Law, adopted in 2015, has picked up interest across the globe, due to its pioneering plan to combat climate change and diversify sources of energy. Article 173 came into effect at the start of 2016 and marked a turning point in carbon reporting, strengthening disclosure requirements for listed companies and introducing carbon reporting for institutional investors.

Progress has also been gathering considerable pace in Germany. In May this year, Deutsche Börse unveiled the Frankfurt Declaration, aimed at catalysing the “holistic mobilisation” of sustainable market infrastructures. This October, Deutsche Börse and the German Council for Sustainable Development unveiled a Hub for Sustainable Finance (H4SF), through which they will pool resources and co-ordinate activities to review regulatory issues and develop market incentives and instruments to encourage sustainable finance. The PRI is one of the founding members of H4SF’s steering committee.

Similarly, Brazil – which aims to reduce emissions by 37 per cent by 2025 – has just launched a Green Finance Lab, bringing together investors, regulators and representatives of key economic sectors, among others, to develop investment instruments and financial structures that maximise private-sector leverage and optimise the use of donor funds.

Closer to home, the UK’s Minister for Climate Change and Industry and the Economic Secretary to the Treasury recently announced a Green Finance Taskforce, on which the PRI serves, to support the government’s clean growth plans.

High level catalysts

These initiatives and many others are building on the momentum of what has become a well-known acronym in the sustainable investment universe: HLEG – the European Commission’s High-Level Expert Group on sustainable finance, formed at the end of 2016. In its latest interim report, the HLEG recommends reforms to EU rules and financial policies, including fundamental changes for the investment culture and behaviour of market participants, with the underlying message that “urgent action is needed”. Specific recommendations include developing a single EU-wide taxonomy for sustainable assets, clarifying fiduciary duties, and aligning reporting rules with the recommendations of the Financial Stability Board Task Force on Climate-Related Financial Disclosures.

The interim report is closely aligned with the PRI’s work on a sustainable financial system, as outlined in our recently launched 10-year Blueprint. As an observer of HLEG, we have been engaging our 1800 global signatories regarding the group and its mission, along with sharing our framing analysis and technical expertise, which includes initiatives on fiduciary duty, stock exchanges, investment practices and credit ratings agencies. The PRI views HLEG’s recommendations as an important step towards an ambitious, but achievable, plan to align Europe’s financial system with pressing sustainability challenges.

Fiduciary roadmaps

In addition to the Blueprint, the PRI, along with the United Nations Environment Programme Finance Initiative and the Generation Foundation, has been busy publishing fiduciary duty roadmaps in eight countries, with recommendations to implement clear and accountable policy, and practice that embraces the modern interpretation of fiduciary duty. We are also forming an expert group of policy professionals for real-time sharing of information on policy and regulation.

It is encouraging to see the issue of financial sustainability climbing up the political agenda. The dial is certainly moving in the right direction, albeit with individual countries at different stages, and challenges unfolding along the way. To overcome these obstacles, the PRI has launched several projects that address the underlying barriers to a sustainable financial system. These are based on the readiness of investment trustees to operate in a sustainable system, asset consultant advice and the limitations of modern portfolio theory, given today’s investment challenges. By addressing unsustainable aspects of the markets in which investors operate, we can deliver a sustainable financial system that contributes to a more prosperous world. At stake are not only the long-term returns of savers, but also a greener economy and a sustainable future.

 

Nathan Fabian is director, policy and research, Principles for Responsible Investment.

While some pension funds still mull the pros and cons of factor-based investment, AP1, the SEK323 billion ($38.5 billion) Swedish buffer fund, is forging ahead. It is about to launch a new approach combining leverage and risk-factor investment in what chief investment officer Mikael Angberg says will be a milestone in the fund’s ability to truly diversify.

Like other Nordic investors, the AP Funds were early pioneers of factor investment, to create more exact and balanced portfolios.

“We’ve been working with a factor approach in parallel with a traditional asset-based approach for a long time,” Angberg says, in an interview from AP1’s Stockholm offices.

Now a strategy to “build it out” and make factor investment “more broad and efficient”, will lead to the fund applying leverage in the form of derivatives backed by liquid assets, to increase factor exposure in multi-asset trend and momentum strategies.

“Trend and momentum factors tend to have a significant impact on the fund’s Sharpe Ratio when we face drawdowns and downturns,” Angberg explains. “We have done a great deal of theoretical work and have run test portfolios with small money but real values. Now we are ready to start [putting tranches] into this strategy.”

Although the fund will “just dip its toe” initially, Angberg hopes the strategy will ultimately set AP1 apart from its sister buffer funds.

“The other AP Funds use derivatives and leverage to some extent, but our ambition is to raise the bar and end up somewhere none of the others have been. We’ve always used leverage, now we are ready to grab hold of it and make it a focus area.”

He anticipates that leverage will initially apply to a notional value of 5 per cent of AP1’s assets under management, but could be eventually rolled out to a notional value of 30 per cent, applying it to a raft of other factors and asset classes.

“The menu is broad with respect to what we could do with leverage, but at this stage we have identified these two factors [trend and momentum] because it makes a lot of sense in terms of shaping the distribution of outcomes for the fund as a whole,” he says. “Going forward, we could also potentially lever nominal and inflation-linked bonds to create a more balanced risk exposure with respect to interest rate and inflation risk, balancing that against equity risk. Where we end up longer term is still a conversation we are having internally and with the board, but I think it is theoretically possible for institutions like” this one to do much more because they have the capability and professionals to handle derivative management and leverage risk management.

Along with increased diversification, the benefits of the strategy include a reduction in reliance on equity risk premium and a limited cost of carry. But what are the risks?

“A lot of people who are not familiar with it see leverage as a risk in itself, but it isn’t,” Angberg says. “It is simply a tool to dial up or down risk in other assets or factors.”

He does realise, however, that dealing in derivatives can sound alarm bells along particular points of the risk spectrum; it brings operational risk, counterparty risk and liquidity risk – all manageable if you know what you are doing.

“The requirements to focus on these areas go up with increased use of leverage through derivatives,” he says. “It requires having systems, processes and resources in place to handle these risks. The global landscape is not homogenous and most institutional investors tend not to use leverage, but I happen to think that in a modern, efficient portfolio, it can be a powerful tool if you know how to handle the risk.”

The strategy promises a shake-up in AP1’s 4.4 per cent allocation to hedge funds, constructed with a focus on commodity trading advisers and trend-following strategies. This will solve an enduring problem.

AP1 finances its hedge fund portfolio by selling equity, a costly strategy when equity markets are so strong and hedge funds have struggled (although Angberg defends their performance). By using leverage to create factor exposure to the momentum and trend strategies it needs, AP1 can change its hedge fund allocation to prioritise other areas.

“There have been some blips along the curve, but it’s not been the environment where we would expect these factor exposures or strategies to really shine,” Angberg says. “The theoretical construction of our hedge fund portfolio has been spot on, the main problem was funding hedge funds by selling equity.

“We will now focus on absolute return and are building a strategy to find uncorrelated, idiosyncratic returns. It could be in alternative credit, it could be in equity long/short or insurance linked. It will add alpha, or just a return on top of our overall portfolio.”

Other factors in other asset classes

Angberg is developing the factor approach further in other areas, too. In equity, where he favours value, quality and low volatility, the fund recently invested $250 million with London-based Osmosis Investment Management, targeting both low volatility and resource-efficient stocks. This is a challenging combination, given that low-volatility companies like utilities are often the most environmentally challenged. The allocation is part of the systematic strategies portfolio that sits alongside the main equity allocation and accounts for 4.4 per cent of net assets.

“We looked at a combination of factors in equity that are attractive, and low volatility was one of them, but we realised it would load heavily on” companies without positive environmental, social and governance (ESG) characteristics, Angberg recalls.

“Osmosis is applying its framework on resource efficiency to the low-volatility universe. It is about trying to find the low-volatility companies that score best on carbon emissions, waste management and water treatment. When they apply these screens, utilities don’t score highly, so exposure will tilt towards other sectors. For example, you end up with exposure to sectors like consumer staples and industrials.”

Osmosis targets a return of 2 per cent above the MSCI World Developed Minimum Volatility benchmark over a market cycle, while at the same time cutting investors’ ownership of carbon, water and waste, relative to the benchmark, by more than 70 per cent.

In AP1’s main equity portfolio, which accounts for 36.6 per cent of AUM, investment is characterised by a concentrated, active strategy with ESG evaluation part and parcel of company analysis. Swedish and developed market allocations are run internally, emerging markets and small caps in developed markets are outsourced. The Swedish portfolio consists of 30 stocks and the larger developed-market portfolio consists of 80-110 companies.

It’s a strategy that requires an expert team and long-term approach, but Angberg, who has headed up investment at AP1 for the last four years, is convinced buying a few well-researched companies is much better than buying an index.

“We didn’t want to be the type of manager that speaks to the benchmark, hugging it, seeking just a little bit of outperformance,” he says. “Because we are long term, we can underperform and be patient in unlocking value. In a concentrated portfolio, you select a few companies from a large universe; it requires conviction and patience and these are the skills we represent.”

The equity portfolio returned 10 per cent in the first six months of 2017.

AP1 has a 30 per cent allocation to fixed-income – as per government regulations that it invest at least this proportion in the asset class – with the rest in a combination of real estate, private-equity funds, hedge funds, infrastructure, high yield, and an ‘other’ allocation that includes alternative beta and systemic strategies. For now, government rules also stipulate a 5 per cent maximum in unlisted assets.

One way Angberg has addressed the need to deliver a 4 per cent annual return, while holding a large fixed-income allocation amid historically low interest rates, is by developing the high-yield allocation. It now accounts for 5 per cent of assets and “sits well” in the portfolio, as it is equity-like but also has characteristics of long-term, lower-risk investments.

ESG integration in fixed income and credit is more challenging than in equity. Most of AP1’s high-yield exposure is with external managers and those at the “forefront of ESG integration” are rare. AP1 just chose Hermes to manage a high-yield bond mandate; the manager’s innovative approach on pricing ESG risks in terms of spread in its fundamental credit analysis is leading the industry.

A business built on advising clients about alternative investments, including private assets and hedge funds, has stood Cambridge Associates in good stead. It has capitalised on this heritage of researching alternative managers and asset classes with its outsourced chief investment officer (OCIO) division.

The US-based Cambridge is known for its advisory work with endowments and foundations, where private and alternative assets have been its specialty. But its OCIO business is its fastest-growing, increasing by nearly 30 per cent each year for the last five years.

Cambridge manages $22 billion for clients of its OCIO business. These clients tend to have a fairly aggressive asset allocation. While it varies by client, a typical allocation for an open plan would include: 10-15 per cent in alternatives such as private equity and private credit; 10-20 per cent in hedge funds; a healthy portion in long-only equities; and 20-40 per cent in fixed income, depending on funding status.

Sona Menon is a Cambridge OCIO working with clients whose assets range from $200 million to nearly $5 billion, and is also head of the firm’s North America pension practice. She says a meaningful allocation to hedge funds is a perfect way to de-risk and also allows portfolios to take advantage of growth opportunities.

“Hedge funds give me some upside but protect the downside,” she says.

 

Tough standards for hedge fund managers

In all asset classes, manager selection is critical, but perhaps more so in the hedge fund universe than elsewhere. The decision is not just about the robustness of the firm or philosophy; it also considers the role the strategy plays in the portfolio, which Cambridge says should be specific for each manager.

Here’s where the firm’s long history of researching alternatives for its advisory business has placed it in an enviable position – hedge funds tap on its door to gain access to investors and join its database.

To do so, the funds must meet strict requirements. A manager has to be of institutional quality, have a certain level of assets under management (dependent on the strategy but typically about $200 million) and exhibit a certain track record. Cambridge also examines the economics and health of the business with its key people, and whether the manager has a repeatable and transparent investment process.

There are about 11,000 hedge fund managers worldwide. Through diligence, Menon says, the firm whittles this vast universe down to a few hundred and recommends about 100 to 125.

“Managers also have to have good enough fee terms that when you pay you still get a good return,” she adds. “The breadth and quality of the research stands us apart. We can benefit from the ideas and due diligence that the research team put together, rework them, and pick the best of the great ideas. Also, because we’ve known these managers for decades, we are often the first phone call when someone spins out.”

Access is a natural advantage in a world where good strategies necessitate closing. About 10 per cent of the strategies in Menon’s portfolios are closed and have waiting lists.

“We are in around four to five strategies that we got into five years ago that you couldn’t today. I like and respect managers who want to close their fund,” she says.

This also serves as a due-diligence test for manager selection and monitoring. Cambridge is active in asking managers when they plan to close, and in monitoring whether they do what they say they’ll do.

“This is an important tool for us to gauge if a manager is asset gathering,” Menon explains. “For example, if a small-cap equities manager is getting to more than $2 billion, we have to question them.”

In terms of construction, a typical portfolio of hedge funds might have about 12 to 15 ideas in it, she says. At the moment, she is favouring sector-focused managers in technology, media and telecommunications, along with global macro.

For an active pension plan client, Cambridge is aiming for a 5-10 per cent return target and would seek long/short managers. For a closed plan, a 3-5 per cent return objective is OK, she says. Clients are mostly corporate defined-benefit plans but also some pension funds of not-for-profits, and public plans.

A high allocation to alternatives, which for Cambridge clients could be as much as 35 per cent in private assets and hedge funds, comes at a cost. This means fees are a large consideration as well.

“When we are looking at alternatives, we evaluate them on a net-of-fee basis, Menon says. “The best hedge fund managers are worth their 2 and 20 fee because of their returns. Our job is to find the best ideas, and if we can’t, then we won’t invest. Fees and terms are a negotiation.”

The fact that hedge funds generally haven’t performed lately has created an opportunity for Cambridge to renegotiate fees with managers, she says. The firm has negotiated fee levels with more than a 100 managers – so that 2 and 20 becomes 1.5 and 20, or 2 and 10 – and has passed on 100 per cent of the fee savings to clients.

“As a whole, we are trying to create a portfolio with less beta,” Menon says. “Alpha costs money but we’re very careful in where we get that.”

 

‘Interesting time to be in active’

The search for alpha is not just in alternatives. Cambridge also likes active credit, and looks to add value through sector selection and geographically focused managers in long-only equities.

“It is an interesting time to be in active,” Menon says. “From an active manager, we look not only to get the best stocks but the best sectors, and protect on the downside by not being in the most expensive names. In the last year, all of my active managers have done really well.”

The recent trailing one-year performance of most of Menon’s portfolios is 8-11 per cent, net of manager fees.

“We beat the benchmark and, more importantly, we’ve met the actuarial rate of return,” she says. “When we see an increase in our clients’ funded status, we lock in some of the return, and can take some of the equity off the table.”

As an example, Cambridge has pulled back from the overweight position it has held in emerging markets, on the back of the asset class’s 30 per cent returns over the last couple of years.

Within investment circles, there is an active discussion about the difference between listed and unlisted infrastructure, with EDHEC Infrastructure Institute arguing that the rise of listed infrastructure requires regulatory intervention from the US Securities and Exchange Commission, on the basis that current practices are misleading investors.

Leaving aside the arguments that EDHEC Infrastructure is making in support of its claim of “fake infrastructure”, as they term it, we would argue that this debate misses the real issue.

For investors who wish governments to open up a pipeline of new infrastructure opportunities, which is necessary if we are to address the multiple challenges society faces, the key lies in building the community’s confidence that they are good long-term stewards of assets.

This is where investors need to focus.

While it is clear that investors are keen to invest in infrastructure, with Preqin reporting $137 billion of dry powder ready to invest in private infrastructure assets as at December 2016, the appetite of public policymakers for private investors may be waning.

An example is UK Labour Leader Jeremy Corbyn, who has promised to take England’s water companies that are in private ownership back into public hands. Corbyn’s recent speech to the Labour Party’s annual conference argued that water companies’ “profits are handed out in dividends to shareholders while the infrastructure crumbles; the companies pay little or nothing in tax and executive pay has soared as the service deteriorates”.

The big issue for infrastructure investors is trust. For publicly owned infrastructure assets, there is a long-established mechanism for the community to express its displeasure if unhappy at the service delivered; democracy makes politicians directly accountable for infrastructure services under their control.

But for privately owned assets, there is no such means of expression. Privately owned assets are mostly managed through largely hidden contracts between the state and the investor, with layers of complex regulation in between. The opportunity for customers to engage around their infrastructure needs is minimal.

A framework in 10 principles

The Better Infrastructure Initiative at the University of Sydney’s John Grill Centre for Project Leadership has focused on this issue in our latest policy outlook paper.

We are proposing a customer stewardship framework for infrastructure that is based on 10 principles we believe collectively represent the practices that focus on long-term customer outcomes. The 10 Customer Stewardship Principles are:

Rights/fairness

Choice/informed

Stakeholder management

Human capital management

Customer service design

Transparency

Planning

Innovation

Risk

Leadership

The first five principles can be summarised as more concerned with the short-term and transactional nature of dealing with customers and stakeholders. That is, they focus on how an infrastructure service provider is delivering customer stewardship day to day. The latter five are more broadly concerned with long-term considerations, and aim to assess how well the infrastructure service provider is preparing the infrastructure asset for the future.

Long-term customer stewardship of the infrastructure system is fundamental to its future success, ensuring infrastructure can adapt, be flexible and serve as a catalyst to security, growth and prosperity. Given the very long economic lifecycle of infrastructure assets, it is imperative that they be able to adapt to their changing social, economic and technological circumstances. Customer stewardship is about seeking to improve the performance of any single infrastructure entity with the enhancement of the broader networks on which it relies and to which it belongs.

As part of our research, we examined 20 Australian infrastructure service providers from the public and private sectors. From the private sector, we examined providers that are listed on the ASX and assets that are owned by institutional investors through unlisted structures. What we found by looking across all different types of assets was that ownership did not matter. There were examples of best practice from across the public and private sectors, including amongst listed companies.

What matters is leadership, and having ambition and culture centred on relationships, reciprocity and participation.

Our research demonstrates that the guidelines for what constitutes infrastructure are blurring. We examined multiple examples where infrastructure providers were incorporating cutting-edge technology into infrastructure management. Examples include Transurban and EnergyAustralia, which are creating new ways to enhance customer access to data with apps that ensure customers are more informed and in control.

We think the customer stewardship framework can help policymakers and infrastructure asset owners/operators have a much clearer understanding of customer outcomes, aligning them with better capital and recurrent expenditure decision-making. In the long term, we believe there is potential for customer stewardship principles to be embedded into every government tender for infrastructure services or sale of infrastructure assets.

If investors are able to demonstrate that they are long-term guardians of infrastructure through customer stewardship, there will be greater opportunity for new investment. This is the conversation investors need to have.

Our policy outlook paper can be accessed here, Why Customer Stewardship Matters.

Gordon Noble is principal adviser at the Better Infrastructure Initiative, University of Sydney.

Eight consecutive years of positive returns have more than doubled the size of the UK’s biggest public-sector pension scheme, the Strathclyde Pension Fund.

The fund has grown to £20 billion ($26.3 billion), since the financial crisis of 2008-09. In 2016 alone, Strathclyde, a scheme for local government employees in the Glasgow area, returned 23.1 per cent, fuelled by equity and currency – the icing on the cake of recent success.

“It has been a stupendous year for us,” chief investment officer Richard McIndoe says in an interview from the fund’s Glasgow offices. “Our overseas exposure is all denominated in non-sterling currencies, so when sterling depreciated last year with Brexit, all that stuff increased in sterling value; a lot of the rise in listed UK equity was also on the base of these companies’ foreign earnings.”

Manager outperformance was a factor, too, he says.

“It’s been absent for a long time, but for the last couple of years, we have done well in terms of outperformance.”

Last year, the strongest managers in the stable for Strathclyde, which outsources all investment management, included Oldfield Partners, which posted a 42.3 per cent return for its concentrated equity allocation, and specialist emerging-markets manager Genesis, which posted a 31.9 per cent return.

“It’s not a no-brainer that active management works,” McIndoe says. “I have certainly doubted it at times, though happily our current experience is that it is working for us.”

Shedding equities to de-risk

Equity markets may have driven recent performance, but strategy is focused on reducing the equity allocation from 72.9 per cent in 2016 to a target 62 per cent allocation. It’s the first phase of a staged process that will result in equity accounting for just 52.5 per cent of the total portfolio.

The pace and asset choice of this de-risking journey will be shaped by the results of an actuarial valuation, due early next year. McIndoe is already preparing for the likelihood that strong investment returns have not offset the growth in liabilities and that the cost of future benefits has probably increased.

“We are definitely on a de-risking path,” he says. “I guess the questions are the when and the what – how quickly, and what do you buy instead.”

One thing is for sure. He is unlikely to buy UK Government bonds, because he is not trying to achieve the kind of liability-matched or completely hedged solution that comes with index-linked gilts.

“It’s not the way we are de-risking,” he says. We are de-risking by spreading assets. We are not hedging and matching, but properly diversifying.”

The diversifying assets will include private debt, emerging-market debt, global credit and UK infrastructure, where the focus is on renewable energy. This allocation is divided between short- and long-term enhanced-yield portfolios, targeting 15 per cent each of total assets under management in step one of the de-risking process.

So far, Strathclyde has boosted its debt portfolio most. It has built up allocations to multi-asset credit run by Babson Capital and Oak Hill Advisors, and embarked on its first allocations to private debt and emerging-market debt. The next phase will probably include more investment in longer-term real assets, particularly infrastructure, where McIndoe is “pondering whether to go overseas or not”, and possibly absolute return.

He acknowledges that competition for real assets may thwart progress.

“There is, unquestionably, more competition for real assets. You have to be patient and careful on the pricing, be selective.”

The fund has opted for new managers in both the emerging-market debt allocation, which was decided via an open tender, and the private debt allocation, where the manager was chosen in a consultant-led process.

“They were new asset classes to us; although a number of names we work with already covered these asset classes, we went with new names.”

In what he describes as “never an easy decision” because “there are a lot of managers out there, even in specialist areas”, Strathclyde chose managers based on organisational structure, people processes, and depth of specialisation.

“We wanted people who are really focused on this, to the extent it is the core of their business,” he explains.

In the wake of last year’s Brexit-triggered currency boosts, McIndoe has decided to lock in gains and is now hedging a third of the fund’s listed-equity currency exposure.

“We looked for the least costly way of doing it, through a passive portfolio that invests in pooled funds. [These] funds are offered on a hedged or unhedged basis and we were previously unhedged. The additional cost is pretty minimal.”

Although all management is outsourced, Strathclyde is building a direct investment portfolio that will ultimately account for about 5 per cent of total assets. Here, an internal team of three focuses on co-investment opportunities in “differentiated” UK assets with strong environmental, social and governance credentials: investments are illiquid and opportunistic, and include a stake in the Green Investment Bank’s Offshore Wind Fund and the Maven UK Regional Buyout Fund, which focuses on small and medium-sized enterprises.

“There is a capacity of £1 billion. We have committed about £800 million and only half of that has been drawn to date,” he says. “It’s pretty early to be measuring return, as they are long-term investments with a J-curve effect, so will profit only in later years. But the numbers from last year are quite positive.”