Terry Faulkner, director of Rexam’s £1.4bn (€2.0bn) UK pension scheme, believes the company’s retirement investment strategy should be as safe and watertight as the drinks cans it has been making for over half a century.
Rexam, which has a market value of £3.1bn, does other things, including making bottles, jars and packaging for medical supplies. Its global presence, however, means its pension schemes are scattered across a number of regions. Mr Faulkner, in addition to running the UK plan, is a fiduciary of the $1.7bn (€1.26bn) US pension plan and a trustee on Rexam’s retirement scheme in Ireland.
Having worked in pensions for old industrials such as BOC Group and Johnson Matthey, and latterly with technology company Nortel Networks, Mr Faulkner describes each pensions experience as “extremely different”. “Covenants were different at each company and plan sizes varied throughout in relation to the market cap of the sponsor,” he says.
As Rexam’s pension scheme membership continues to get older and shrink in size (it was 26,000 at the end of 2006 compared to 28,500 a year before) now is the ideal opportunity to increase fixed income exposure, believes Mr Faulkner.
No more risk
While not quite “doing a Boots”, Rexam’s new long-term investment strategy includes securing as much fixed income exposure as possible and reducing exposure in mainly UK equities. The time for risk is now over, the scheme’s chief has concluded.
At present, bonds make up around 25 per cent of total asset allocation of the scheme, but this will rise to “no less” than 40 per cent of invested assets as part of Mr Faulkner’s major review of the plan’s investment strategy.
“The de-risking of the UK scheme continues the trend established by our US plan, which has 85 per cent in fixed income,” he explains, saying that as there is no index linking in the US, arguably there is “no upside to having a surplus in the fund.”
The move to bonds in the US wasn’t necessarily all down to choice, however. Following the $900m acquisition of American National Can, Rexam took on pension liabilities as part of the deal. In mitigation the acquisition gave Rexam access to the North American can market.
A scaled-down workforce in the UK, and a maturing pension scheme which will require retirement income to be paid sooner rather than later, suggested to Mr Faulkner and his pensions team that the long-term investment strategy should be to “go fixed”.
But this is not an immediate switch. “We have a matrix which moves some money each month, so if the equity market keeps going up, we will still switch but it won’t make any difference to the overall asset allocation,” he says. If bonds start to perform much better, then you’ll see big changes, he adds.
Rexam’s close relationship with equities will be broken up gently. From 73.6 per cent of total invested assets in 2004 to about 67 per cent at the start of 2007, the long-term goal is to have equities account for no more than 50 per cent of total assets.
As part of this de-leveraging process, a logical progression is to shift from having a heavy exposure to UK equities. Rexam currently has about £500m, over a third of its fund, invested passively with Barclays Global Investors and an active UK equities mandate via Mirabaud Investment Management.
Mr Faulkner explains the move: “The problem with having too much weighting in the UK equity market is that it is dominated by certain industries and companies that, although are quoted on the UK exchange, are in fact international. In other words you are actually buying into international index exposure concentrated in volatile areas, which is a risk.”
In the short-term, Mr Faulkner says he seeks a more aggressive equity outperformance from Rexam’s active managers. “Although we are moving into bonds more and more, we still need outperformance from good equity managers,” he says.
Avoiding alternatives
Until now, Rexam’s investment exposure in the alternative spaces has been negligible, apart from some residual associated with early private equity managers currently being transitioned out. However, the move to greater bond exposure and a tightening in equities has offered Rexam around a tenth of total asset space to, theoretically at least, be invested in alternative investments.
The company’s recent Statement of Investment Principles, referencing the long-term, said: “Alternatives should be no more than 10 per cent of invested assets.”
Mr Faulkner is understandably cautious in how this is interpreted. “We are considering all investments on a regular basis and we are looking at alternatives. Our modest absolute return exposure has served us well in the past,” he says. Rexam’s investment in private equity returned 6 per cent in 2006. Property, which accounts for about £70m of the fund, did similarly well. “Bricks and mortar has been a good performer for us,” he adds, “In hindsight, we wish we could have had a different investment asset allocation”.
But how would hedge funds play their part in Rexam’s latest strategy of de-risking, a tactic so intrinsic to the scheme’s long view of its investment objectives?
“One understands why many investors see hedge funds as ‘weapons of mass destruction’, but they do have their place,” admits Mr Faulkner, who believes there is a role for diversification in Rexam’s scheme and this may include hedge funds further down the line.
He added that the novelty of hedge fund investing may in fact be wearing off, as more strategies enter mainstream investing. “In the case of long-short, this style is now considered standard, certainly in pooled vehicles,” says Rexam’s pensions chief.
“Under the alternatives umbrella, skill-based strategies might be one of the more viable options going forward, be it in currency management or tactical asset allocation,” says Mr Faulkner. He believes the important question that should be asked by pension schemes is whether, over the long term, alternatives can offer real value to the strategic asset allocation of the scheme. “They can create short-term benefits in terms of benchmark outperformance, but can real value be created in the long-run?”
One aspect of alternatives exposure that Mr Faulkner is concerned with is the debate related to fee transparency and disclosure historically targeted at hedge funds but more recently at private equity funds. “We are all pretty keen on transparency, but sometimes I’m not sure what we do with it, once we get it, and in my experience you have to take a lot on trust,” he says. “I’ve no doubt we will get better transparency in private equity than we currently have,” he adds.
Mr Faulkner says the issue of timing is something else schemes need to heed to, prior to exposing assets to alternative products. “You don’t want to hold hedge funds if they fall 40 per cent, it’s crucial to get the timing right and there is a fiduciary duty for trustees to consider,” he explains.
Manager review
Last year Rexam appointed Mirabaud Investment Management (UK equities), Rogge Global Partners (bonds), and Taube Hodson Stonex Partners (global equities), in addition to changing mandates awarded to UBS Global Asset Management (pan-European equities), Russell (Japanese and emerging market equities) and Barclays Global Investors (index-tracking equity funds).
As a consequence of this manager review, the current roster is described by Rexam’s Faulkner as effectively “a new line up”. “We’ve gone to a number of boutiques, looking for talented individuals and skill-based strategies are fine by us,” he explains. He says that fees were negotiated on all of the managers up for review.
Mr Faulkner describes Rexam’s current FRS 17 deficit of £130m as “not too much of a concern”, which on the surface might seem foolhardy. He counters: “We have the right agreements in place and start from a solid base and importantly there are no objections to our long-term goal of switching to bonds, backed by a good relationship between sponsor and trustee which is vital.”
Annualised investment returns for the Rexam’s UK scheme for the year ending 31 March 2006 were 25 per cent, against a benchmark of 25.4 per cent, according to data provided by Mellon.
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