Strathclyde Pension Fund has decreased its allocation to corporate bonds in favour of a wider absolute return bond strategy, to rebalance its portfolio as spreads tighten.
More defined benefit schemes are switching out of traditional bond holdings in favour of a broader range of fixed income assets, and in some cases alternatives, consultants have reported.
Asset allocation v benchmark
Equities: 75.9% v 72.5%Bonds: 11.6% v 15%Property: 8.6% v 12.5%Cash: 4% v 0% Source: Strathclyde Pension Fund Committee, quarterly meeting minutes
The scheme's quarterly committee meeting minutes show it sold £135m of its passive bond portfolio after the spread between corporate and government bonds yields fell below its second trigger of 130 basis points at the end of October last year.
More defined benefit schemes are switching out of traditional bond holdings in favour of a broader range of fixed income assets, and in some cases alternatives, consultants have reported.
The first 150bp spread trigger was hit in March 2010, after which the £13.4bn scheme implemented its first switch from corporate bonds to gilts, according to the scheme’s minutes.
In January, £80m of the most recent sale, along with £80m from a sale of equities, was reinvested in an absolute return bond strategy.
The reallocation of funds was part of a long rebalancing story that has taken place over the past three to four years, said Richard McIndoe, head of pensions at Glasgow City Council, which administers the Strathclyde fund.
“Our strategic position is government [bonds] first but we took, I guess, a tad overweight in corporate bonds, which we had planned to reduce over time when the spread between government and corporate bonds hit a certain level,” said McIndoe.
The remaining £55m from the sale is being held in the fund as cash. Since credit spreads were above the scheme’s third trigger of 110bp in December, the committee agreed that no more rebalancing of its portfolio would take place at the time.
For corporate DB schemes, many of which are closed to future accrual, corporate fixed income still plays a useful role matching liabilities, said John Belgrove, senior partner at consultancy Aon Hewitt.
For these schemes, Belgrove said he had seen a lot of action around diversification, derisking and acting more dynamically, all of which apply to corporate bonds.
But local government pension schemes have a much higher equity exposure and are less invested in fixed income and liability-driven investment strategies.
“That’s because the LGPS remain open, so they’re accruing benefits for existing members,” said Belgrove. “They can take a very long-term view, they have arguably a stronger employer covenant [therefore] they tend to accept more risk.”
Trustees of DB schemes looking for more value have been turning to bank loans, absolute return bond strategies and multi-credit strategies, Belgrove added.
Other investment targets
The scheme plans to further increase its allocation to UK property over the course of the year. It has an 8.6 per cent allocation to property, up from 8.1 per cent, after the scheme purchased a London-based multi-let retail park in December.
Strathclyde made a strategic decision to invest 12.5 per cent of its assets to property a few years ago and has been building up its allocation towards that benchmark ever since, said McIndoe.
“But equity markets were so strong in 2013 that as a percentage of the overall fund we found that even though we were after investing in property, it wasn’t really growing,” he said.
Some schemes have disinvested money from corporate bonds and reinvested it in property, particularly long-lease property, based outside London, said Adam Michaels, partner at consultancy LCP.
“It’s got much more liability-matching characteristics in a way, and this has a long-term lease with perhaps inflationary uplifts,” said Michaels.
This type of property can yield around 6 or 7 per cent, Michaels said, while London-based prime property typically delivers no more than 4 per cent.
The scheme is also considering plans to invest a further £7.5m within its “new opportunities” portfolio. This would be used to acquire a utilities connection business and to provide equity for investment in renewables projects.
The proposal would be structured as a Scottish Limited Partnership. “I guess it’s the sector where we see the best opportunities just now, because renewables projects are ready and investment propositions are well-structured,” said McIndoe.
The investments made via the portfolio are reviewed on an ongoing basis, McIndoe said.
