London Borough of Hillingdon Pension Fund has shifted its equity portfolio away from UK holdings and towards unconstrained strategies, but the move has so far failed to perform.
Higher-dividend equities are becoming more popular with schemes looking to both derisk and secure greater yield.
The £683m scheme allocated £29m to a global higher-dividend fund after disinvesting assets from UK equities, according to its 2013/14 annual report.
It stated: “Following a review of the fund’s asset allocation and style risk profile, the committee decided to reduce the fund’s exposure to UK equities and lock in gains from the outperformance of the [higher-dividend equity fund] through 2013/14 and to increase exposure to emerging markets where the fund was underweight.”
However, in the three months to June 2014 its global higher-dividend investment returned 0.87 per cent compared with 1.23 per cent earned by its benchmark the MSCI All World Index +2 per cent, according to a report by its custodian.
These have a better diversification of the market exposure so they’re not regionally concentrated
Allan Lindsay, JLT Employee Benefits
This culminates in a return for the scheme of 5.75 per cent since January 2013, versus the benchmark of 16.52 per cent.
The City of Westminster Superannuation Fund decreased its UK equity holdings in favour of global stocks to give managers greater flexibility and boost performance.
Allan Lindsay, head of investment consulting at JLT Employee Benefits, said schemes have gradually been reducing their exposure to UK equities in favour of global and higher-dividend equities.
“These have a better diversification of the market exposure so they’re not regionally concentrated,” he said.
John Belgrove, senior partner at consultancy Aon Hewitt, said higher-dividend equities have become popular with maturing defined benefit schemes, declining in liabilities yet searching for yield.
“Higher-dividend equities can deliver a yield, keep cash flow going and although you have got the risk of equities there’s a point of view that says, I’m better off spending my money in terms of value in defensive high-yield equities than getting the paucity of yield I can get from the fixed income market,” he said.
Hillingdon's trustees also decided to withdraw £30m from corporate bonds and invest £15m in a debt opportunities fund and £15m in a secondary property fund to further diversify the scheme’s assets.
Lindsay said schemes might want to allocate more to gilts despite low yields, rather than to corporate bonds.
“We are actively going out to clients and saying, ‘The credit spreads of the yields actually going above gilts has come in quite significantly’,” he said.
