Beliefs

A scheme’s ability to take on investment risk in excess of the minimum risk inherent in its liabilities is finite. Railpen’s mandate is to advise on and manage this investment risk on behalf of the Trustee to deliver sufficient long-term returns from the assets to meet the schemes’ liabilities over a range of environments.

To achieve this, Railpen focuses on a small number of asset-liability risk drivers that can really impact a scheme. We then closely manage them, ensuring risk and success measures are able to support good long-term focused investment decision making.

Many of the sections within the railways pension schemes have long investment horizons. Along with a stable asset base, this allows the schemes and sections to harness the benefits from illiquid assets, and for Railpen to focus on longer-term valuations and cash flows when managing the assets.

On behalf of the Trustee, Railpen acts like the long-term asset owner we truly are, not afraid to be patient where decisions may result in pay-offs that are far into the future. We lean into periods of volatility and illiquidity, where others might shy away. Taking the time to position ourselves as an attractive long-term counterparty helps us access the right investment opportunities. Strategic partnerships in innovative areas take time to build but can offer significant reward.

Maintaining the ability to make long-term focused investment decisions is critical to success. To fully exploit the benefits of long-term investing, Railpen design investment solutions to be resilient to stressed environments and manage risks in line with the multiple investment horizons the schemes are exposed to.

When designing investment portfolios, Railpen focuses on diversifying the underlying structural drivers of cash flows and return rather than short-term risk relationships, which are often driven by liquidity and risk-aversion. We believe there is value in analysing how different asset types perform in different environments through history and thinking through the fundamental drivers of an asset going forward.

Investment decision making is aligned to delivering the best overall asset portfolio rather than overly focusing on individual components. Leverage is used to support the diversification of investment risk and ensure key asset-liability risks, such as inflation and interest rates, are managed in a capital-efficient way.

Environmental, social, and governance (‘ESG’) factors affect corporate financial performance, asset values, and asset-liability risk. Well-informed and financially material ESG analysis, as part of a holistic investment process, supports the identification and ultimately the pricing of ESG risk and opportunity. Constructive engagement combined with thoughtful voting can protect and enhance investment value.

A long investment horizon exposes a pension scheme to societal and systemic risks, such as climate change. These risks are growing and need to be managed. Capital allocation by investors and corporates makes a difference in how these risks play out. Railpen has a responsibility to make a scheme’s assets resilient to systemic threats and position portfolios for long-term opportunities. We believe it is possible and necessary to deliver the returns the schemes’ need, whilst positively contributing to the world our members retire into.

Focusing on long-term asset and liability risk relationships across different macro and market environments to design an investment strategy tailored to a scheme’s objectives and characteristics provides robustness to an investment process. However, risk relationships change over time, implementation often differs from the assumptions in a model – both in risk profile and ability to deploy – and market opportunities rarely align to investment strategy reviews.

Railpen increases the effectiveness of its investment process by focusing on the desired risk-return characteristics from the schemes’ assets using a multi-asset approach. This approach supports allocating to investments with favourable reward-to-risk profiles in a timely manner, without compromising the schemes’ overall investment and funding strategy. Opportunistic investing can add material value over time but must be appropriately risk managed.

Overly diversified market-capitalisation weighted indices, or herding towards popular strategies, do not necessarily provide a good starting point for portfolio construction. Railpen recognises the value to be received from concentrated positions in high-quality assets we thoroughly understand. Allocations should primarily be made to assets with conviction, and should be sized to have a noticeable impact on a scheme’s objectives.

Occasionally the type of asset that will best serve the needs of the schemes does not exist, so where possible Railpen builds or structures the assets the schemes’ need. We try to focus on less crowded areas of the market, but ensure we fully understand the value and risk of any investment we make.

Railpen cannot deliver the best outcome for members on our own. Our hybrid internal/external model ensures investment decisions are aligned to schemes’ needs and that costs are managed, whilst maintaining sufficient coverage of the investment universe by well-resourced internal investing specialists. Our sophisticated and collaborative investing culture fosters innovation. Our sense of purpose and investment approach allows us to attract and retain the high quality talent needed to execute on our investment philosophy.