The Pension Protection Fund has revised its statement of investment principles, trimming its allocation to cash, bonds and equities as it seeks to capitalise on the illiquidity premia of so-called ‘hybrid’ assets.
Hybrid assets are investments with both liability-matching and growth characteristics, but they are often illiquid.
The £16bn fund completed its first significant investment in a hybrid asset last week, with a £330m co-investment in a 23-year lease on two commercial properties in Manchester.
PPF's new asset allocation
Cash and bonds: 58% (from 70%)
Alternatives: 22.5% (from 20%)
Equities: 7% (from 10%)
Hybrid: 12.5% (n/a)
Source: Pension Protection Fund
The PPF will introduce an allocation of 12.5 per cent to hybrid assets over the next three years. It will also increase its allocation to alternatives while trimming investment in cash, bonds and equities.
Barry Kenneth, chief investment officer at the pensions lifeboat, said: “The requirement of central clearing will cause the cost of hedging to increase and financial regulations are challenging banks’ abilities to warehouse risk.”
He added: “Investing in hybrid assets enables the PPF to prepare for these changing market conditions by acquiring assets that provide long-term cash flows and have less reliance on derivatives.”
Hybrid assets being investigated by the fund may not necessarily be illiquid in nature, but rather offer a premium when held until maturity, experts said.
Nicola Ralston, director at PiRho Investment Consulting, said that while illiquid assets such as property were a common investment for funds, the PPF’s approach was different.
“They’re talking about long-term assets intended to be held to maturity,” said Ralston. “I would say those kinds of assets are not typically owned by pension funds.”
The fund’s new SIP describes hybrid assets as “illiquid assets which are intended to be held to maturity and exhibit either interest rate and/or inflation hedging characteristics such as sterling index-linked corporate bonds, private placements of bonds, structured notes”.
Illiquids have gained attention as schemes continue to look for ways to match liabilities while generating growth.
For example Dorset County Council Pension Fund last month released details of a move into infrastructure.
“If you believe you can provide some additional premium it’s well worth it,” said John Belgrove, senior partner at consultancy Aon Hewitt.
“My view is that pension schemes underuse illiquid assets; there’s definitely room for more.”
