Kent banks £150m to take equity gains, predicting volatility

Relatively strong equity market performance over the past few years has led some schemes to seek to protect gains, typically through purchasing low-risk assets often used to track liabilities.

According to Kent's reports and accounts 2014, the fund outperformed its overall returns benchmark over one, three and five-year periods. 

James Scholes, chairman of the superannuation fund committee, stated in the report: “With equity markets continuing to perform strongly and our investment managers also performing well, the fund increased in value by £324m or 8.5 per cent in the year.”

However, he added: “Whilst the rise in equity markets has been highly beneficial there will be some volatility in markets moving forward. We have taken active steps to protect some of the financial gains made last year.”

Nick Vickers, head of financial services at Kent County Council, said one of the steps to protect gains was to bank as cash £150m from its equity allocation. The scheme is currently 3.9 per cent overweight on its UK equities compared with its strategic benchmark, and 1.5 per cent overweight on its overseas equities allocation. 

“Our view is that the main issue in the next 12-18 months is how equity and fixed income markets will react to rising interest rates,” he said.

Vickers attributed the fund’s performance to a number of its mandates outperforming. The scheme also invested £90m in secondary property and is looking to make additional investments in absolute return strategies. 

“The fund has been fortunate that in recent years the very largest mandates, Schroders UK equities, Baillie Gifford Overseas Equities, Invesco UK Equities… and DTYZ direct property have all outperformed," said Vickers. "And asset allocation has been overweight equities and we have been steadily adding to property over a long period."

Simon Hill, chief investment officer at Buck Consultants, was optimistic about the future performance of the equities market. “From a medium-term perspective, we are still advising clients to be overweight equities. We’ve been saying that for about three years,” he said. 

Hill added that pension schemes do not usually hold cash. He said: “For a scheme trying to meet liabilities it’s more common to hold fixed income assets to match liabilities.”

Neil Jamieson, head of UK and Ireland for investment provider ETF Securities, said: “[Cash] would be a good place to put them initially, then you’re going to want to put some of the cash to work."

He added: “Unquestionably markets have performed very well. Given how well they’ve performed last year you can certainly see the rationale for pulling back and looking to re-enter in future. When markets perform strongly it’s a good idea to book profits and bank them.”

Last year it was reported Kent would increase its property allocation by £60m, partially from money taken from its equity allocation. Vickers said the fund had now invested an additional £30m into property.

“We invested £90m in two secondary property funds in very early 2014, £50m with Fidelity and £40m with Kames,” he said.