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Investment Strategy

Delivering the funding plan

Zephyrus Partners advises on investment strategies tailored to delivering the deficit Recovery Plan.

Even in circumstances where employer contributions and asset returns have reached all-time highs, deficits have not improved as expected.

With an appropriate investment framework, the return objective becomes less challenging.

The problem: Investment activity doesn’t have the right focus

  • Investment strategy and market risks are insufficiently prioritised versus short-term process e.g. manager monitoring.
  • Despite common belief, the investment horizon is not driven by being able to pay benefits as they fall due over the long term but by the medium term deficit recovery horizon.
  • Actuarial and accounting frameworks hinder the sponsor’s focus on clear investment objectives.
  • Covenant strength may be perceived as an incentive to reduce the reliance on financial performance and detract from investment strategy.

The need: Use clear investment objectives and enhance market-focus

  • Define an unambiguous investment framework (for both assets and liabilities) to define precisely the investment performance objective.
  • Ensure investment advice is conflict-free.

The solution: Robust risk management underpinned by rigorous monitoring

  • Appropriate investment governance is needed.
  • Financial market decision-making and monitoring becomes the key focus.
  • Ensure that the strategy and the deficit performance can be appraised ex post.
  • Understand the drivers of performance of market exposures as well as their complementary diversification qualities.
  • Appropriate Key Performance Indicators (KPIs) are essential for the monitoring of the strategy (and not only of managers).

The result: Investment performance delivers a consistent contribution to deficit recovery

  • Effective portfolio construction results in improved returns on a risk-adjusted basis.
  • Risks are removed that the sponsor has no incentive to take.
  • The probability of delivering the plan is improved.
  • The trustees become proportionally less reliant on the covenant.