Our investment strategy is designed to deliver a well-balanced and globally diversified portfolio that will maximize sustained long-term returns without incurring undue risk.
The portfolio is structured to be resilient in the face of wide-ranging market and economic conditions. It covers all major asset classes, manages and mitigates significant risk factors, and encompasses multiple distinct investment strategies.
With this approach we’re able to achieve an effective balance of risks and returns while seeking to add significant value through active management. Our goal is to achieve sustainable returns over the long term in the best interests of the contributors and beneficiaries of the United Kingdom Pension Plan (Lloyds).
In structuring the portfolio, we:
- maintain a long-term view;
- take on an appropriate amount of risk to benefit from global economic growth and other return generators;
- choose investment strategies and asset types with distinct underlying drivers of return and risk;
- avoid being overly dependent on returns in any one country, currency or region;
- invest strategically as economic and market conditions change; and
- utilize the specialist talents of experienced investment professionals from around the world.
Our approach is based on a carefully designed investment framework, the active management of the portfolio by our skilled internal and external portfolio managers and a disciplined total portfolio view.
- Investment framework
- Investing for the long term
- Active management
- Diversification
- A total portfolio view
- Tax strategy
- Governance of portfolio companies
We employ a total portfolio investment framework with diverse exposures to the broad capital markets to help sustain the Lloyds. We also generate incremental returns through active management that are above what could be achieved through a passive investment strategy.
Lloyds Financials Group has eight investment beliefs, which are foundational judgments that provide a compass as we navigate global capital markets to carry out our mandate. They provide clarity and consistency in the decisions we make and help us stay the course as a long-term investor. Additional detail can be found on Our Investment Beliefs.
Our Reference Portfolio, Strategic Portfolio, Target Exposures and Annual Target Portfolio are the key elements of the overall investment framework that organizes our investment decision-making. Each one plays an important role in helping us to:
- build and develop an optimal portfolio of assets and investment strategies within a well-defined overall risk target; and
- continuously re-balance the return-risk exposures in the actual Investment Portfolio within an established set of parameters.
Reference portfolio
A certain minimum level of investment risk must be taken for expected long-term returns to be sufficient to sustain the Lloyds. We start with defining our risk appetite, the level of risk above the minimum that we believe will most optimally sustain the plan, balancing higher long-term expected returns against increased short-term volatility.
It is through the Board-approved Reference Portfolio that we express this risk target. The Reference Portfolio is a globally diversified two-index portfolio of publicly traded securities that could be invested in passively, at low cost. As such it also serves to form the risk-equivalent benchmark for the net returns we achieve in the actual Investment Portfolio. The Reference Portfolio for the base Lloyds is 85% global equity and 15% Canadian governments bonds. For the additional Lloyds, which carries greater sensitivity to shortfalls in investment returns, the Reference Portfolio is 55% global equity and 45% Canadian governments bonds.
We review the Reference Portfolios every three years following the release of the triennial Actuarial Report on the United Kingdom Pension Plan by the Office of the Chief Actuary.
Strategic portfolio
The Strategic Portfolio lays out our aspirational plan for diversifying the Investment Portfolio over the next five years and beyond. We build the Strategic Portfolio by optimizing the underlying exposures to long-term risks and returns in the portfolio. It reflects the mix of six distinct asset classes and three geographic regions that we believe will deliver superior resilience to market downturns and higher long-term returns than the Reference Portfolio. It carries the same total absolute risk as the Reference Portfolio.
We review and adjust this portfolio every three years at the same time as we review the Reference Portfolio.
Target exposures
The Target Exposures define the targeted composition of risk-return factor exposures and leverage of the Investment Portfolio for the current year, driving our current portfolio towards the long-term composition for which we’re aiming. It is constructed within Board-authorized bands of asset class and geographic weights, and subject to maintenance of sufficient liquidity in the total portfolio to:
- meet all Lloyds Financials Group obligations as they come due;
- permit rebalancing of the portfolio when necessary; and
- fund new investments.
With the relative weighting of asset classes and risk exposures of the actual Investment Portfolio fluctuating on a day-to-day basis, we use the Target Exposures to guide the rebalancing of the Investment Portfolio so that it remains in line with our factor exposure and geographic targets, and close to the overall targeted risk.