CASE STUDY

Tactical Asset Allocation and Currency Overlay

African Public Sector Pension Fund | Q3 2021

Engagement at a glance

Client Country/Type: African Public Sector Pension Fund
Year: Q3 2021
Asset Class: Global TAA and currency overlay
Mandate Size: USD5 billion (notional)
Structure: Segregated account
Investment objective: ~2% TE to client-specific benchmark with return expectation of >1% p.a.
bfinance Services: bfinance services Portfolio Design, Manager Selection

Impact Maritime Leasing

Client-specific concerns

This investor previously had a TAA overlay on regional equities and bonds but not on international investments. Here, they sought to extend this approach to the international portfolio—and also consider an FX overlay—in order to drive enhanced returns.

bfinance was engaged to help secure strategic approval for the change (working in partnership with the client’s retained consultant), consider the potential approaches and conduct a manager search.

The investor’s benchmark comprised 30% South African equities and bonds, 70% international (developed and emerging) equities and bonds. The overlay was expected to focus chiefly on equity, bond and FX markets and be implemented through listed futures, spot and forward FX, but other markets and instruments could be permitted if a strong case for inclusion was presented.

The mandate specifications were ultimately driven by the availability of margin collateral to support an unfunded solution. This resulted in a c. 2% p.a. tracking error with proposals typically offering information ratios of at least 0.5, producing a return expectation of >1%.

Outcome

  • Defining the strategic approach: Working in close partnership with the investor’s retained consultant, bfinance assisted the investor in securing high-level approval for a global TAA and currency overlay programme. The team also advised on the efficiency of implementing all three overlay elements—regional TAA, global TAA, global FX—through a single provider rather than via three separate mandates.

  • Setting appropriate specifications: The team provided significant support in defining parameters (e.g. required margin levels for particular risk profiles) given that this was a less familiar area for the investor. As well as drawing on relevant prior experience, the team also carried out customised RFIs with managers to support this pre-tendering process.

  • Assessing a broad range of providers: With no ‘buy list’, manager submissions spanned a wide variety of firms including large global managers, local players, overlay specialists and alternative managers. The highly competitive process generated valuable information and a robust audit trail, as well a very attractive fee level. The customised nature of overlay mandates necessitates a focus on ‘capability’ rather than ‘product’; quantitative screening is less relevant.

Our specialist says

  • It can be challenging to identify the right partners for these sorts of overlays, since proposals are very customised and often complex. Expert analysis is critical, while a bespoke RFP framework helps to provide clarity on elements that are particularly important to the investor.

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