The Pension Protection Fund has targeted a broader range of sophisticated fixed income assets while maintaining a liability-driven investment strategy in order to reduce the fund’s overall risk.
The fund has a 70 per cent strategic allocation to cash and bonds but has also moved into more alternative assets, according to its 2013 report.
We’ve made some changes in the portfolio such as alternative credit
More schemes are now investing in asset classes not traditionally utilised by pension schemes, in order to take advantage of favourable pricing.
The PPF’s investment management fees have increased to £78m at March 31 2013 from £47.8m at the same time the previous year. This is due, in part, to investments in a broader range of assets, according to chief executive Alan Rubenstein.
“We’ve made some changes in the portfolio, such as alternative credit, and those are more expensive to run than government bonds, for example, but obviously we’re expecting better rewards out of that,” he said.
Management fees have also increased due to a rise in the number of assets held by the fund to £14.9bn at March 31 2013 from £11.1bn the previous year.
The PPF’s net investment returns for 2013 were 11.1 per cent, compared with 25.2 per cent at 31 March 2012.
“We are pretty fully hedged against inflation and interest rates, and bond yields came down a lot more in the 12 months to March 2012 than they did to March 2013 – of course they still carried on heading down,” said Rubenstein.
The PPF's Martin Clarke explains how its investment strategy aims to outperform liabilities
However, the fund’s managed assets beat their liability benchmark by 4.6 per cent in 2013, compared with 2.1 per cent the previous year.
Monitoring success
Managers will be classed in comparison to a benchmark as either performing as expected, needing enhanced supervision, or not performing as expected and will then have assets taken away from them.
“There would be a flag if, for example, there was a sudden drop off in performance or if there was a change in leadership of one of our managers; that would be flagged up by our consultants or by ourselves,” said Rubenstein.
Trustees need to understand the characteristics of the asset class and how it could help them achieve their objectives, said Mark Nicoll, partner at LCP
“For any trustee looking to invest in new asset classes, [they] need to understand what they’re investing in," he added.
Finding the right manager with specialist skills also becomes more important when investing in alternative assets, Nicoll added.
