River and Mercantile Derivatives, part of River and Mercantile Group, has been awarded a GBP1.2 billion structured equity options mandate for Worcestershire County Council Pension Fund (the Fund).
The Fund was seeking downside protection for its passive UK, US and European equities, with a combined market value of approximately GBP1.2 billion. De-risking by moving from equities to other asset classes at this stage of the cycle would have reduced return expectations for the Fund and impacted the affordability of future benefits to members. Instead, the Fund determined that an equity protection solution would be the most suitable way to maintain equity market exposure and reduce the likelihood of further contributions from the Sponsor in 2019.
Following a competitive tender process and presentations to the Worcestershire County Council Pensions Committee, River and Mercantile Derivatives was appointed to design, execute and provide ongoing management of a structured equity protection strategy that optimised the level of downside protection whilst still participating in a level of upside exposure from the Fund’s passive UK, US, and European equities over an 18-month period.
The Chief Financial Officer of Worcestershire County Council Pension Fund says: “Our research determined that a static options equity protection strategy would be the most suitable for the Fund, representing better value than an active solution, and would be more straightforward to implement. After initially considering four providers, the Pensions Committee recommended that River and Mercantile Derivatives be appointed to implement and manage the equity protection strategy.”
The Fund was supported in its research and selection process by its independent investment advisor, Philip Hebson, a senior advisor from MJ Hudson Allenbridge.
Masroor Ahmad, Managing Director of River and Mercantile Derivatives, says: “Following the extended period of positive returns in equity markets to the beginning of this year, we have seen an increasing number of local government pension schemes interested in our market leading derivative capabilities to manage the downside exposure in their portfolios while maintaining their allocation to equities.
“The derivatives team at River and Mercantile has a 10 year track record in designing and managing this type of risk management solution for clients, and we’re delighted to be working with Worcestershire County Council Pension Fund.”
Mike Faulkner, CEO of River and Mercantile Group says: “We have seen significant weakness in equity markets and a consequent rise in volatility. Our view is that we are in the “Apprehension” phase of the market cycle. We have been advising clients of this view and have been helping them develop plans to prepare to defend.
“Clients can insulate their equity risk through structured equity or a variety of other strategies and we are well-placed to help clients determine the best approach in their specific circumstances.”
