USS, for example, stress that under the RP approach the trustee board focuses on strategic scheme objectives, the investment committee on the appropriateness of the overall investment strategy and delegations, and USS Investment Management Limited (a wholly-owned subsidiary of USS and the principal investment managers and advisor to the scheme) on the specifics of asset allocation, implementation and reporting. This underlines another key difference between the two approaches – while a SAA would typically be set on a calendar basis in order to update it based on the prevailing market conditions, the RP should only be changed to reflect fundamental changes in market conditions or the objectives of the scheme.Īdvocates point to this difference as an important governance benefit of the approach. This latter point is of particular importance because it means the RP is not influenced by short term market conditions, which a traditional SAA approach would be. Others, including the NZSF, have described the RP as an “equilibrium” concept, such that it is structured based on the fund’s assumptions of the average long-term value of various asset classes over long periods, regardless of what is actually happening to those values in any given market conditions. “The investor can deviate from that, but the reference portfolio acts as a reference point.” “It sets the centre point for what an investor wants to achieve over the next 20 years,” he explains. According to John Finch, investment consultant at JLT Employee Benefits, uptake is expected to increase, “especially,” he says, “in the context of the growing trend towards fiduciary management, where reference portfolios can help set the journey plan”. So far, the approach is just beginning to edge into the UK market, but things are changing. It is about deciding where point B is when the portfolio is mature and how to measure and monitor progress against that process.” Sally Bridgeland, senior adviser with pension fund investment governance consultants, Avida International, says: “The idea is to create something that is more specific to what a scheme is allowed and wants to invest in. Its role is as a theoretical benchmark, not a guideline for what the invested portfolio should contain. In essence the reference portfolio maps out the long-term journey plan of a pension fund and is designed to be a model for a scheme’s desired risk and return characteristics rather setting out a desired asset allocation framework (as the traditional strategic asset allocation (SSA) approach does). Since then, other pension plans including the New Zealand Super Fund (NZSF) and the UK’s Universities Superannuation Scheme (USS) have adopted the same approach, which, in the words of the NZSF, is a “notional portfolio of passive, low-cost, listed investments suited to the fund’s long-term investment horizon and risk profile”. The notion of a reference portfolio was first introduced by the Canada Pension Plan Investment Board (CPPIB) in a move that reflected a shift away from passive indexed portfolios towards more active management and a higher allocation to private market assets. Like all tools, however, its effectiveness depends on how it is used and how good the underlying assumptions are. In a world increasingly focused on liabilities, value, diversification and dynamism, the evolution of the reference portfolio (RP) approach to asset allocation appears to make a lot of sense. Some wouldn’t want to work any other way.” Barbara Saunders “There is not much difference behaviourally between a reference portfolio and a traditional strategic asset allocation approach. Managers still hug a market-related benchmark.
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