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A case study in LGPS diversification

Hammersmith & Fulham– a case study in diversification for a new regime. 
Ben Crawfurd-Porter
Manager – UK Institutional

Authored by Ben Crawfurd-Porter (Ruffer) and the London Borough of Hammersmith & Fulham Pension Fund.

The London Borough of Hammersmith & Fulham’s Pension Fund Committee has long emphasised running a well-diversified fund. At times, this may have looked overly cautious, particularly when all asset prices rose in tandem either side of the pandemic. But it is paying off now – particularly during 2022 when the fund was able to proactively take opportunities in a challenging environment. It is likely to continue to pay dividends as we enter a more uncertain and volatile investment regime, where diversification using the traditional LGPS building blocks is much harder to achieve.

The importance of a genuine diversifier

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.

Lessons for LGPS

What are the lessons looking forward? Some of the key dilemmas facing all LGPS funds are: 

  • De-risking (which does not mean necessarily mean lower returns) given strong funding positions and a more challenging outlook 
  • Negative cashflow positions as inflation impacts obligations more than contributions
  • Active management of the risks and opportunities of a more volatile regime

By maintaining a large position in its absolute return fund, Hammersmith & Fulham is helping to address all three. A diversifying strategy with a strong track record allows an element of strategic de-risking, whilst maintaining upside exposure and the flexibility to re-risk if required. A highly liquid strategy is a core allocation that can future proof against negative cashflow concerns. Crucially, it also provides LGPS with a strategy that can itself be active and opportunistic, whilst injecting those characteristics into the overall Fund by providing liquid, uncorrelated returns. 

These should be key considerations for all LGPS funds as they consider their strategic asset allocations on the cusp of a more challenging investment regime. 

The new inflation regime
The return of inflation has changed the investment environment for LGPS funds. This challenges the ability of LGPS to diversify, meet their obligations and actively manage risk or capture opportunities. In this piece, we ask three LGPS professionals the key question for this new regime: what is your plan?
Read
LGPS: liquidity lessons from the LDI crisis
The long-term hunt for yield has driven LGPS funds to adopt a liquidity barbell, with listed equities and bonds at one end of the spectrum and illiquid alternatives at the other. But these assets’ performance can be worryingly correlated at times of market stress.
Read

Ruffer Absolute Return fund performance to 31 Dec %
2018 -6.0 | 2019 9.0 | 2020 10.0 | 2021 10.3 | 2022 7.1

Sources: Ruffer, Bloomberg


Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.
Ruffer LLP has not considered the suitability of this fund against any specific investor’s needs and/or risk tolerance. If you are in any doubt, please speak to your financial adviser. The fund data displayed is designed only to provide summary information and the report does not explain the risks involved in investing in the fund. Any decision to invest must be based solely on the information contained in the Prospectus, Key Investor Information Document and the latest report and accounts.
The fund’s prospectus and key investor information documents are provided in English and available on request or from ruffer.co.uk. Please note that LF Ruffer Absolute Return Fund is a UK UCITS and is not registered for distribution in any country other than the UK. In line with the Prospectus, it is possible that at any one time the LF Ruffer Absolute Return Fund may invest more than 35% of its assets in transferable securities issued or guaranteed by an EEA state, one or more local authorities, a third country or a public international body to which one or more EEA States belong. The only aforementioned securities where Ruffer would currently consider holding more than 35% would be UK or US government issued transferable securities. This financial promotion is issued by Ruffer LLP which is authorised and regulated by the Financial Conduct Authority. © Ruffer LLP 2023. 80 Victoria Street London SW1E 5JL +44 (0)20 7963 8100 ruffer.co.uk. The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer. 
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London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France