Quarterly Investment Bulletin - Capita
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Quarterly Investment Bulletin June 2021
Contents 1. Equities
2. Nominal yields
3. Inflation
4. Real yields
5. Credit
6. Asset class performance summary
7. An Introduction to dynamic de-risking triggers
Owned by Capita 2
Global equities continued to rise over the quarter
Figure 1: Equity market returns (rebased at 100) 1
• Global equities generally continued to see improvements over the second
150 S&P 500 TR quarter of 2021, with markets now comfortably ahead of pre-Covid-19 levels.
145 FTSE All Share TR
Eurostoxx 50 TR
All major indices made positive returns over the quarter, apart from Topix
140
135
Topix TR which returned -0.3%.
MSCI Emerging Markets Index TR (USD)
130
125 • US equities posted a strong quarter of positive performance, rising by +8.5%.
120 This means that the S&P 500 index is now up by +40.8% since the end of
115 June 2020.
110
105
• The FTSE All-Share index continued to see improved growth with returns of
100
+5.6% over the quarter. The UK Equity market is now up by 21.5% since end
95
90
June 2020.
• In the eurozone, the EuroStoxx 50 index returned +4.9% over the quarter.
Source: Bloomberg, Capita European equities are now up by 28.2% since end June 2020.
Equity Markets Percentage Change
• In Japan, the Topix index fell slightly over the quarter, returning around -0.3%.
However, the Japanese equity market is up +27.3% since the end June 2020,
Index 30/06/2021 (Price) 1 Month 1 Quarter 1 Year
similar to European equities.
S&P 500 (TR)
8943 2.3% 8.5% 40.8%
FTSE ALL-Share (TR)
7852 0.2% 5.6% 21.5% • In emerging markets, the MSCI Emerging Markets Index returned +5.0% over
EuroStoxx 50 (TR) the quarter. Emerging Market Equities are now up +40.9% since the end of
8931 0.7% 4.9% 28.2%
Topix (TR)
June 2020, similar to US Equities.
3071 1.2% -0.3% 27.3%
MSCI Emerging Markets Index TR (USD)
671 0.2% 5.0% 40.9%
Source: Bloomberg, Capita | 1 Total returns in local currency
Owned by Capita 3Nominal gilt yields fall slightly across the curve during the quarter
Figure 2: Nominal term structure of gilts Figure 3: 10-year and 30-year nominal yields
2.5 1.6 Nominal Gilt Yield - 30-year
Gilt Yield Curve 30-Jun-21 1.4 Nominal Gilt Yield - 10-year
2.0
Redemption Yield %
1.2
Gilt Yield Curve 31-Mar-21
1.0
1.5
Yield
0.8
0.6
1.0
0.4
0.2
0.5
0.0
0.0
0 10 20 30
Maturity (yrs) Source: Bloomberg, Capita
0
-2
Rise in both gilts yields and growth assets over the year presents opportunities
Change (bps)
-4 • Nominal gilt yields decreased slightly across all maturities, over the second quarter of the year.
-6 • The funding level improvements that were seen over the first quarter of 2021 have maintained at a similar level
-8
due to the continued rally in growth assets.
-10 • As a reminder, this has presented an attractive de-risking opportunity for some schemes as they have found
-12
themselves ahead of where they expected to be on their Journey Plan.
2 5 10 15 20 30
• This is especially true for schemes with relatively low levels of liability hedging (LDI).
Gilt Yield Change Maturity (yrs)
Source: Bloomberg, Capita
• Trigger-based dynamic de-risking strategies, where funding levels are tracked daily and pre-agreed de-risking is
undertaken when triggers are hit, are often the most efficient way to capture temporary de-risking opportunities.
Owned by Capita 4Future inflation expectations broadly unchanged
Realised (past) inflation rises over the quarter
Figure 4: Gilt-Implied Future Inflation Expectations 2 Figure 5: Realised (past) CPI in the UK, US and Eurozone
4.0
6.0
3.5 UK (CPI) UK (RPI)
Breakeven Inflation %
5.0
3.0
Eurozone (CPI) US (CPI)
4.0
2.5
Change in %
2.0 Breakeven Inflation Curve 30-Jun-21 3.0
1.5 2.0
Breakeven Inflation Curve 31-Mar-21
1.0
1.0
0.5
0.0
0.0
0 10 20 30 -1.0
Maturity (yrs)
8 Source: Bloomberg, Capita
Breakeven inflation
6 Change
4
Inflation
• Future inflation expectations maintained at around the same level as the end of June
Change (bps)
2
0 2021 causing little effect to each maturity, with the biggest effects for the middle
-2 turns. This has acted to keep pension scheme liabilities at around the same levels.
-4
-6 • Realised (past) UK CPI inflation rose over the quarter from 1.0% as at end of March
-8 (as restated) to 2.1% at end of the quarter 3. Realised UK RPI, however, was up to
-10 3.3% compared to 1.5% for the end of the previous quarter (as restated).
2 5 10 15 20 30
Maturity (yrs)
Source: 2 Gilt breakeven inflation has been calculated as the
Bloomberg, Capita difference between nominal Gilt yields and real Gilt yields.
3 At the publication date of this bulletin, the ONS had not yet announced the end June CPI and RPI rates so we have used end May figures as the
Owned by Capita latest available. 5Real yields decrease across most of the curve
Figure 6: Gilt real yield4 term structure Figure 7: 10-year and 30-year real yields Source: Bloomberg, Capita
0.0 0.0
-0.5 -0.5
Real Redemption Yield %
Gilt Real Yield Curve 30-Jun-21 Gilt Real Yield - 30-year
-1.0 -1.0
Gilt Real Yield - 10-year
Gilt Real Yield Curve 31-Mar-21
-1.5 -1.5
Yield
-2.0 -2.0
-2.5 -2.5
-3.0 -3.0
-3.5 -3.5
0 10 20 30
Maturity (yrs)
10
Gilt Real Yield
Real Gilt Maturity Points (yrs)
5
Change
Yields
Real yields
2 5 10 15 20 30
Current % as at
• Real gilt yields remain negative for all maturities.
Change (bps)
0 -2.27 -2.92 -2.62 -2.40 -2.27 -2.06
30/06/2021
1 Month Change • Real yields fell slightly across all maturities, except 5 years, and
-5 4 20 4 -1 4 4
(bps) are still at similar levels to last quarter across most of the curve.
1 Quarter Change
-10 -7 7 -2 -2 -7 -12
(bps)
1 Year Change
25 -18 21 31 25 28
-15 (bps)
2 5 10 15 20 30
Source: 4 Gilt real yield has been calculated as the yield on
Maturity (yrs) Bloomberg, Capita index-linked Gilts
Source: Bloomberg, Capita
Owned by Capita 6Corporate bond spreads largely unchanged over the quarter
Figure 8: GBP corporate bond spreads over gilts by rating Figure 9: GBP corporate bond spreads over gilts by rating
(change over month/quarter/year) (historic)
10 4.6 4.0 Over 15 Year AAA Credit Spread
2.8
(+15 Yr Gilts Index) %
Premium over Gilts
0 3.5 Over 15 Year AA Credit Spread
-2.0 -2.0 -2.3 Over 15 Year A Credit Spread
Credit Spreads (bps)
-10 -3.6 -5.0 -6.7 3.0
Over 15 Year BBB Credit Spread
-20 -16.9 -17.3 2.5
-30 2.0
1 Month Movements
-40 1.5
1 Quarter Movements -43.9 1.0
-50
-60 0.5
1 Year Movements
-70 0.0
-66.4
AAA AA A BBB Jun 16 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21
Source: Bloomberg, Bank of America Merrill Lynch, Capita
Source: Bloomberg, Bank of America Merrill Lynch, Capita
Owned by Capita 7Asset class performance summary in local currency and GBP
Asset Class Quarter Return 1 Year Return
FTSE All Share TR 5.6% 21.5%
Asset class performance summary S&P 500 TR (Local, GBP) 8.5%, 8.5% 40.8%, 26.3%
• The charts below and the table to the right show the one-quarter Eurostoxx 50 TR (Local, GBP) 4.9%, 5.8% 28.2%, 21.2%
and one-year performance in local currency and GBP of Topix TR (Local, GBP) -0.3%, -0.8% 27.3%, 10.9%
investments in major asset classes to the end of June 2021.
MSCI Emerging Markets Index TR (USD, GBP) 5.0%, 4.4% 40.9%, 23.9%
• Over the quarter, US equities was the best performing asset FTSE A GILT +15 Yrs 3.2% -10.9%
class. iBoxx Non-Gilt £ 10+ TR 3.1% 0.7%
FTSE A ILG +5 Yrs 3.9% -4.4%
FTSE 350 Real Estate Index 7.9% 21.2%
Morningstar Diversified Alternative Index TR 2.1% 2.8%
Bloomberg All Hedge Fund Index 0.3% 6.3%
Total returns in local currency, GBP | Source: Bloomberg, Capita
Quarter Return 1 Year Return
FTSE All Share TR FTSE All Share TR
S&P 500 TR (Local, GBP) S&P 500 TR (Local, GBP)
Eurostoxx 50 TR (Local, GBP) Eurostoxx 50 TR (Local, GBP)
Topix TR (Local, GBP) Topix TR (Local, GBP)
MSCI Emerging Markets Index (USD, GBP) MSCI Emerging Markets Index (USD, GBP)
FTSE A GILT +15 Yrs FTSE A GILT +15 Yrs
iBoxx Non-Gilt £ 10+ TR iBoxx Non-Gilt £ 10+ TR
FTSE A ILG +5 Yrs FTSE A ILG +5 Yrs
FTSE 350 Real Estate Index FTSE 350 Real Estate Index
Morningstar Diversified Alternative Index TR Morningstar Diversified Alternative Index TR
Bloomberg All Hedge Fund Index Bloomberg All Hedge Fund Index
-2% 0% 2% 4% 6% 8% 10% -20% -10% 0% 10% 20% 30% 40% 50%
Source: Bloomberg, Capita Source: Bloomberg, Capita
8
Owned by CapitaAn introduction to dynamic de-risking triggers
Monitoring with intent
• Introducing a dynamic de-risking framework will
Some schemes have missed short-lived opportunities when Schemes invested in equities experience funding level try to make sure that de-risking takes places
assets and liabilities have moved close together outcomes which differ from projections at the optimal times in a pension scheme’s
journey, rather than being reviewed triennially.
• In conjunction with the scheme actuary, we can
monitor a scheme’s funding level and risks daily
Opportunities to de-
risk
using the PFaroe technology.
• We can implement a trigger based de-risking
framework, which takes risk off by moving
from growth assets to matching only as the
funding position improves, based on a
funding-level information feed. Triggers are
monitored daily.
• We can also provide quarterly monitoring reports
which show the position of a scheme versus the
agreed triggers.
9
Highly Confidential – Owned by Capita 9“We have been using Capita’s daily de-risking trigger service for over five years. Our scheme has three
sections and in 2020 we were able to purchase annuities for all the liabilities in one section of the scheme due to
Dynamic de-risking the de-risking actions we had taken. The trigger framework is clear and when a trigger is hit, advice is given by
the investment consultant with the confirmation of the scheme actuary.
triggers – case study This gives us the comfort to act and implement the pre-agreed investment switches. The other two sections
remain on triggers and both are close to their next trigger. The service gives us confidence that if a short term
market event leads to an unexpected improvement in funding, we are ready to act.”
Chair of Trustees
A client of £19.5m in assets and approximately 650
members wanted to look at a dynamic trigger mechanism.
We performed the initial analysis to set up triggers based
on the 2011 actuarial valuation. The trigger plan was
agreed in 2012. At that point, the solvency level was
approximately 60%.
We agreed a series of 8 triggers to get to fully funded on a
low risk basis by 2021. The aim was to then move to 100%
in gilts. This was revised later on as buyout came within
range to be an approximate portfolio to better match
annuity prices.
Between 2013 and 2016 a number of triggers were hit. We
then produced revised analysis following a new actuarial
valuation, which allowed us to reset triggers, with only 3
triggers remaining – still with the aim of targeting full-
funding on a low risk basis by 2021.
100%
Asset Allocation
In 2018 the final trigger was hit and buyout was within 80% Gilts
reach. Improvements in funding then allowed the plan to 60% Corporate
buy out completely in 2020, with the final assets being Bonds
40% DGF
transferred to an annuity provider.
20%
Equities
0%
10
Required Return (above Gilts) p.a.
Highly Confidential – Owned by CapitaContacts and regulatory statement
Lydia Fearn Joel Riddaway
Head of Pensions Consulting Senior Investment Analyst
Email: Lydia.Fearn@capita.com Email: Joel.Riddaway@capita.com
Regulatory statement
The information contained within this presentation does not constitute financial advice.
The information provided is based on our understanding of current law and taxation as at the date of this report.
HMRC policy, practice, and legislation may change in the future.
Capita Pension Solutions Limited is part of Capita plc www.capita.com. Registered in England and Wales No. 02260524. Registered office 65 Gresham Street London EC2V 7NQ. Capita Pension Solutions
Limited is authorised and regulated by the Financial Conduct Authority 2021 Capita plc. All rights reserved
2021 Capita plc. All rights reserved.
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Owned by CapitaOwned by Capita 12
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