Vodafone scheme diversifies with alternatives additions

Pension schemes have been showing increased interest in diversifying their portfolios by adopting more alternative asset classes in the hunt for higher yield.

As a result of an investment strategy review, the telecommunications company's pension scheme “added more diversity to the investments in the Vodafone section”, according to a 2015-16 newsletter to members.

This section now has a new 6.5 per cent allocation to alternative beta and a 14.1 per cent allocation to credit. Furthermore, the scheme introduced a 4.4 per cent core private markets allocation and a 7.3 per cent alternative credit bucket to the portfolio.

The changes follow Vodafone’s decision to transfer the assets and liabilities of the Cable & Wireless Worldwide Retirement Plan to the Vodafone UK Group Pension Scheme in 2014, resulting in two segregated sections, now with a combined size of around £4.9bn.

“The trustee [board] has also simplified the investment portfolio for the Cable & Wireless Section,” states the newsletter. This involved decreasing the section’s exposure to hedge funds and private market investments.

Source: Vodafone

Private debt

The hunt-for-yield mentality dominating markets has driven investors to seek out other sources of return

Anthony Fobel, BlueBay Asset Management

The decision to introduce a new core private markets allocation to the Vodafone section of the scheme is not unusual.

While private asset classes can include commercial property, private equity, mezzanine debt and farmland, an increasing number of pension funds are turning to private debt.

“The hunt-for-yield mentality dominating markets has driven investors to seek out other sources of return,” said Anthony Fobel, head of private debt at BlueBay Asset Management.

Fobel said institutional investors are “allocating a greater portion of fixed income to alternative debt” because in the current low-yield environment, European private debt “is an area that can potentially provide higher yields and protection from volatility”.

“Businesses still need to borrow, but banks have been moving away from mid-market lending, and the slow recovery of some European economies has resulted in an increased demand for capital as business look to expand, giving rise to the private debt market as alternative lenders step in to fill the lending gap left by banks,” he said.

Fobel highlighted the fact that low public market fixed income yields are proving difficult for long-term, liability-driven investors looking to generate returns and focus on capital preservation.

Alternative beta

With regard to the scheme’s new alternative beta allocation, many pension funds are opting for this asset class in a bid to diversify their portfolios.

Toby Goodworth, head of risk and diversifying strategies at investment consultancy firm bfinance, said there has been a huge amount of interest in alternative beta recently.

Alternative beta attracts investors for a number of reasons, according to Goodworth. These include diversification, cost factors, transparency and liquidity.

He said some investors use it to “augment hedge fund portfolios, perhaps looking to lower the overall cost of their alternatives portfolio”, while other pension schemes sometimes use alternative beta as a natural extension to smart beta. “So smart beta plus alternative beta equals factor-based investing.”

Although alternative beta is popular, Goodworth said that “one of the stumbling blocks… is the education element” because people do not know what to expect from it.

Goodworth said it can be defined as a systematic strategy that follows a static, well-defined set of rules, operating in liquid, transparent markets.

Alternative beta is an umbrella term that encompasses alternative risk premia, and “also what we’ve dubbed hedge fund beta”, he added.

Goodworth said: “In general, most alternative beta strategies have very low equity betas, and so they’re a good diversifier for schemes who may want to control their equity exposure.”