Hammersmith & Fulham first allocated to the Ruffer strategy underlying the LCIV Absolute Return Fund, which it holds within a ‘dynamic asset allocation’ bucket, in mid-2008. A significant strategic weighting enabled the Fund to weather the market turmoil of the global financial crisis – and then to capitalise on many of the opportunities available through 2009-10, thanks to the active management offered by this strategy.
The long bull market of the 2010s led many to question the need for such an allocation, as both growth and alternative assets performed well. However, what rises together can also fall together, and concerns grew later in the decade that increasing cross-asset correlations might mean fewer sources of protection. At the 2016 triennial valuation, the Fund’s funding level increased 5% to 87%. That prompted a review, which suggested a strategy to spread risk across a range of asset classes and return factors could benefit the Fund. This contributed to the Fund’s decision to keep its allocation to the LCIV Absolute Return Fund at 10%, as an effective means of downside protection and diversification.
The 2019 valuation resulted in an increase of the funding level to 97%. A further review led to the decision to disinvest from a particular fund manager and double its LCIV Absolute Return Fund holding to 20% in late 2020. This allowed the Fund to de-risk over concerns around a potentially challenging investment environment caused by low interest rates and covid. It provided a liquid and uncorrelated core to the Fund to help meet its future reallocation requirements whilst also, crucially, injecting the flexibility to take opportunities at a time of rising volatility.
During the highly volatile three years to the end of 2022, the LCIV Absolute Return Fund delivered an annualised return of over 9%. Crucially, the diversified returns were consistently positive, with no significant drawdowns and high liquidity maintained throughout. No mean feat during 2022 when all assets fell together and the severe LDI triggered liquidity crunch hit UK gilt markets. That helped the funding level increase to 105% by the 2022 valuation and continued to add significant value through an increasingly difficult 2022.
These returns were made possible by using unconventional protective assets and dynamic asset allocation. Both are hard for LGPS funds to achieve but will be essential if the volatile new investment environment persists.
For Hammersmith & Fulham, it enabled a proactive approach to the market turmoil of 2022. Pre-existing capital calls for private market assets were met from a position of strength, using the liquid profits of the diversifying strategy. It did not have to miss out on excellent buying opportunities or to sell portfolio assets that had fallen. This has left the Fund in a strong position, having met its return objectives and strategic priorities without asset allocation creep or forced selling.