Lloyds Bank’s larger defined benefit pension fund has ditched a proportion of its equity holdings in favour of credit and hedge fund strategies, as pension funds widen their search for diversified sources of return.
The bank's £15.6bn Number 1 pension scheme had reduced its developed market equity holding to 14.3 per cent by 2013, down from 22.7 per cent in 2012. Following a further sell-off, the scheme's current global equity allocation is now 3.9 per cent, with 2.1 per cent in emerging market equity.
“A principal objective for the new strategic asset allocation has been to increase the scheme’s exposure to credit assets,” the scheme said in its annual report. “The trustee completed investments of £280m in two multi-strategy alternative credit funds, managed by Oakhill and Brigade.”
The scheme sold £1.3bn of developed market equities during 2014, while also reducing its emerging market equity assets by £275m. It also invested £320m and £210m in alternative credit funds, managed by Ares and Beachpoint respectively.
Mitch Reznick, co-head of credit at asset manager Hermes, said multi-strategy credit funds were able to “rotate” to capitalise on opportunities, but schemes should select their managers carefully.
“This is not a homogenous class of investment strategies,” he said. “You need to get under the hood and understand what you’re paying for.”
Simon Cohen, associate at consultancy Barnett Waddingham, said schemes were increasingly interested in alternative forms of credit.
However, he said: “When we talk to clients about multi-asset credit we also talk about absolute return bond funds, because both have a wider opportunity set than traditional credit assets.”
He added that multi-asset credit tended to offer better returns than absolute return, but was more exposed to credit markets and lacked the downside protection.
Annabel Gillard, director of fixed income at fund manager M&G Investments, said schemes were turning to illiquid credit to cash in on their ability to tolerate locking in capital.
Gillard said the increasing capital requirements for insurers was creating opportunities for schemes. “Pension funds are almost unique in being able to take illiquidity as there’s more and more pressure on insurers,” she said.
Lloyds also made two separate £135m investments with hedge funds Brevan Howard and MKP, alongside a £130m investment with hedge fund Prologue.
Daniel Broad, pensions senior manager at consultancy KPMG, said the majority of the broad range of schemes it deals with are still “net contributors to hedge funds”.
“But there’s been a number of high-profile cases where investors have moved away and that’s skewing the market perception.”
The funds chosen by the Lloyds scheme use global macro strategies. Many global macro funds have had muted returns in recent years due to global monetary policy dampening volatility, but Broad predicted new opportunities would begin to emerge.
“The ECB is still in easing mode, Japan is in a similar situation and to an extent the UK is,” he said. “In the US they’re going into tightening. When you start to get those differences in policies you start to get volatility for global macros to exploit.”
Lloyds’ Number 2 pension scheme, the smaller of the schemes at net assets of £6.3bn, made similar changes to its asset allocation. However, the amounts invested were smaller, with a total of £172m invested in hedge funds and £600m of developed market equities sold.
