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Impact Investing

IPE special report May 2018

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Alternatives to come under pressure – Hermes

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UK - Demand for excess returns as well as transparency is likely to put alternative assets classes under increasing pension fund scrutiny over the next 10 years, suggest officials at the investment company behind BT's pension fund.

Mark Anson, chief executive of Hermes - the firm responsible for managing the investments of the £42.5bn (€62.3bn) British Telecommunications pensions fund - said the move to diversify into private equity and hedge funds means asset managers will find it increasingly difficult to deliver strong returns over the coming decade as demand for such investment increases.

This is particularly important, suggested Anson, as transparency has become an essential element of pension fund relations and managers now have to justify exactly how they achieved their yields.

"There is a lot of talk about and action towards the ‘de-risking' of funds. De-risking funds means we are taking some of the risk away but with it we take some of the potential returns. The more we reduce risk, the less we are able to add value," said Anson.

"One of the most interesting developments in the last 10 years is the transparency of investment processes and the information pension funds expect. It is no longer possible to say you earned excess returns, you must demonstrate it.

"It makes for a more challenging landscape. As more [pension funds] invest in private equity and hedge funds, and the more they demand access, the more these markets will come under pressure to deliver returns," he added.

His comments follow the publication of WM figures revealing the BT pension scheme achieved an average return of 9.3% per annum over a 10-year period compared with an average return of 8.9% per annum for the UK's top 50 largest pension firms.

Reviewing his experience of the UK pensions market over the last 10 years, Anson predicted while pension funds have seen huge changes to their corporate governance and liability management these pressures were considerably easier than those pension schemes will face over the next decade.

"The challenges we have faced over the last 10 years will not be as difficult as those we encounter over the next 10 years. The financial industry has only become more competitive as people seek alpha from whatever source they can find. And as an industry, we're going to have to work even harder," continued Anson.

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