Developing our investment capability in developed markets

USSIM, USS’s in-house investment manager, is committed to ensuring it develops the investment capabilities required to deliver a portfolio that meets the long-term financial needs of USS’s members.

We’ve recently established a new team to invest in developed market public equities. Our first mandate, Long-Term Real Return, reflects the need for growth assets to generate an attractive long-term return while being sensitive to the inherent volatility associated with investing in equities.

Our long-term investment horizon has enabled the team to design an innovative approach that captures the benefits of long-term equity exposure while protecting against the worst of periodic market drawdowns, or declines. Instead of being anchored to traditional benchmarks to construct portfolios, the team are focused on the factors influencing the scheme’s liabilities (the amount USS needs to pay out in pensions in the future), such as inflation. We believe the addition of this Long-Term Real Return mandate to the overall investment portfolio is very much aligned with the long-term financial needs of members.

Currently 70% of assets in the Retirement Income Builder, the DB part of USS, are managed in-house. Building this new capability to run the mandate internally, with no conflicts of interests (i.e. everything we do is solely for members), means the portfolio has been specifically tailored to meet the needs of the scheme. These include not only taking on the right levels of risk to meet our return objectives but also our responsible investment activities.

By the end of June 2024, the Long-Term Real Return mandate had over £4bn invested in a focused number of what we believe to be high-quality companies. All companies have met a high hurdle for inclusion, with each company having a strong and durable competitive advantage from our perspective. Distinctive brands, distribution networks or intellectual property are examples of the competitive advantages we seek to identify. Examples of these companies include Visa with its well-known payment network, Colgate with is eponymous toothpaste or LVMH, the luxury goods company, with its stable of long-established brands. These high-quality companies, with difficult to replicate advantages, will hopefully bring a generation of attractive long-term returns at lower levels of risk than the market.

For all these companies, we’ve embedded a thorough assessment of climate and other environment, social and governance (ESG) issues into the entire investment process. The portfolio management team work closely with our responsible investment team to ensure appropriate consideration is given to all financially material ESG risks and opportunities. More specifically, the mandate has very low emissions intensity, which supports USS’s ambition for its investments to be net zero by 2050.

Owning a concentrated list of companies means we can focus our resources on being active stewards of them. This includes voting and engagement activities to improve governance and encourage disclosure of ESG issues. Already this year we have met with almost all the companies held within the mandate, improving our understanding of the businesses and encouraging behaviour consistent with the long-term financial interests of members. For example, in a recent meeting with LVMH we discussed the CEO’s succession and voiced our concerns around the potential risks of a board dominated by the largest shareholders – the Arnault family. USS also works alongside other investors to engage, for example we are part of an initiative discussing the future of food with Nestle and Unilever to ensure healthy and planet friendly nutrition.

This new investment capability significantly enhances our in-house ability to deliver tailored investment solutions for the scheme, and in turn members. The Long-Term Real Return portfolio provides an attractive equity allocation for members’ pensions by delivering the right risk vs return balance, while fully integrating responsible investment considerations.