Investment Report

  • Christine Johnson

  • Trustee & Chair of the Investment Strategy Group

Principal investment objective:

The principal investment objective of the Trust is to invest the funds received from plan sales in such a way as to maximise the likelihood that the Trust’s assets will be sufficient to meet the costs of all pre-paid funeral plans as they mature.

Investment strategy:

The Board determines its investment strategy based on the recommendations of the Investment Strategy Group (ISG) and after taking advice from our investment advisers. The Board’s objective is to invest the funds to generate income and capital growth.

The Board has put in place a diversified asset allocation which comprises mandates with various investment managers to take advantage of investment and expertise in different areas. Our current target is to hold 40% of assets in index-linked gilts, with the other 60% divided between global equities, diversified growth funds, commercial property, infrastructure assets, corporate debt and cash. The asset allocation strategy is designed to ensure that the assets are diversified and of appropriate investment quality.

The allocation by asset class at 31 March 2023 is shown in the chart below.

Investment managers:

The investment manager agreements in place with the investment managers set out guidelines for the underlying investments held by the funds. The Trustees carry out due diligence on each of the investment managers, ahead of appointment, on the operation and governance of each of the funds or mandates and agree appropriate controls.

Representatives from the managers of the underlying funds, including the senior personnel directly responsible for managing the mandate, are required, on a rolling basis, to attend meetings with the ISG to be challenged on their fund’s performance and to explain any future changes in the fund holdings or management. This helps both to monitor performance and to understand how each manager is discharging its responsibilities.

During the year, the Board approved the ISG’s recommendation to make a change to the investment manager for the active global equity mandate. This change was recommended following the ISG’s review of the past and expected future performance of each of the underlying managers and their mandates. The ISG undertook an identification and interview process following which Schroders was identified to replace Artisan as the manager for our global equity mandate. In the intervening period between the decision to replace Artisan, identifying the replacement manager and funding the mandate, the Artisan holding was disinvested and the proceeds invested in a passive global equity mandate with LGIM. This was done to maintain global equity market exposure. The funding of the mandate with Schroders occurred post year-end.

The performance of the investment managers is measured against specific benchmarks and monitored by our investment advisers and by the ISG. Each month our investment advisers provide the ISG with a statement of the overall performance of the investment portfolio and of each of the underlying managers. A full report is provided each quarter which is used by the Board in their review of investment performance.

The allocation by investment manager at 31 March 2023 is shown in the chart below.

Investment performance:

The year to 31 March 2023 began with inflation in the developed world at its highest rate in several decades. Inflation had risen over 2021 as the global economy reopened following the COVID pandemic. However, just as inflation appeared to be peaking, the Russian invasion of Ukraine in February 2022 provided a secondary inflationary impulse to the economy. The year to 31 March 2023 was therefore dominated by rising inflation, central banks raising interest rates in an attempt to bring inflation under control, and elevated volatility as markets struggled to adjust to higher interest rates. These factors resulted in most asset classes producing negative returns over the year.

As shown in the chart below, the overall return on the portfolio was -8.1% over the year to 31 March 2023. Over the five-year period from 2018, the average return on the Trust’s investment portfolio was 3.1% and over the ten-year period from 2013, it was 4.3%. Whilst the chart shows year to year fluctuations, it is important to appreciate that the Trust takes a long term view on its investment portfolio which is designed to provide for the anticipated invoice costs of funeral plans on maturity over the expected life of the plans.

The majority of the Trust’s holdings had a negative 12 months in the year to 31 March 2023 which was a period of significant volatility. The property fund holdings with Threadneedle and Aviva were the biggest detractors over the period, however, they both outperformed the MSCI UK All Property Index which fell by 14.5% over the 12 months to 31 March 2023. The holdings in LGIM’s UK equities and the Ruffer Absolute Return Fund returned modest positives. The negative performance in the year resulted in a fall in the value of the portfolio (net of additions and disposals) from £1.312 billion at 31 March 2022 to £1.181 billion at 31 March 2023

Outlook:

The likelihood and impact of risks to the investment portfolio are considered by the ISG at its quarterly meetings and any agreed actions and additional control measures are taken to the Board for approval. Alongside this we regularly instruct our investment advisers to perform and report on the results of stress testing scenarios.

It has been the objective of the Board to spread the risks of investment and to strengthen the investment portfolio so that it can meet such challenges. Over the year, given the emerging economic risks, we have continued to consider the ongoing appropriateness of the investment strategy both at a portfolio and individual mandate level and have responded with changes to the strategy and portfolio. The ISG continues to work to ensure the portfolio is positioned to meet its objectives and to be resilient to risks and volatility in so far is possible now and into the future.

Christine Johnson
Chair of the Investment Strategy Group
30 June 2023