Our strategic aim for Defined Benefit (DB) growth assets is to diversify away from equities. We allocate to growth assets using five sub-portfolios, which do not necessarily fit well with the categories provided in the list above. We believe that the classification of our sub-portfolios best reflects that return characteristics of the group of assets in the underlying funds.
Investments in this sub-portfolio give schemes exposure to the equity risk premium, the additional rate of return investors require to compensate them for the risk of holding stocks as compared with holding a "risk free" asset.
Investments in this sub-portfolio give schemes exposure to the credit risk premium. This typically means investing in debt instruments that earn a return over the risk free rate (such as UK government bonds) in compensation for assuming the risk that a borrower will not meet their contractual repayments, of either interest or capital.
3. Market Neutral
Investments in this sub-portfolio provide access to investment strategies that look to produce returns in a number of economic scenarios, generally without relying on positive performance of equity (and often credit) markets. The strategies in this sub-portfolio invest in a range of asset classes and instruments, and should not be considered an asset class in themselves; the main driver of return is a manager's ability to successfully allocate across different types of instruments.
Investments in this sub-portfolio provide schemes access to investment strategies that look to invest in a range of illiquid assets, both equity and debt. By investing in these assets investors expect to earn a return superior to what would otherwise be available through holding more liquid securities that can be sold at short notice; this is referred to as the 'illiquidity premium'.
Investments in this sub-portfolio aim to give holders exposure to the insurance premium, where the return is derived from providing insurance to a third party. For example, TPT's Insurance-Linked Securities manager earns a premium of providing insurance against damage caused to properties (residential or commercial) by natural catastrophes such as hurricanes or earthquakes.