Avon tweaks bond strategy

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  • Avon tweaks bond strategy

UK - Avon Pension Fund has decided to increase its allocation to corporate bonds through a reduction in its investments in gilts.

Following the recent appointment of HSBC Actuaries and Consultants as its investment adviser, Bath and North East Somerset Council commissioned a review of the pension scheme's investment strategy, which was last agreed in 2006. (See earlier IPE article: Avon calls on HSBC)

Although HSBC concluded the existing strategy of 20% in bonds, 60% in equities and 10% each in property and absolute return funds or hedge funds remains appropriate for achieving the council's long term funding requirement, it highlighted a number of other areas for further consideration.

Issues relating to a revision of the rebalancing policy and a new framework for currency hedging, including whether to adopt passive or active hedging, and reviews of the passive equity portfolio and hedge fund investments, have been delegated to the investment panel for detailed examination.

However, HSBC told members at the last meeting of the pension fund committee that a tactical switch from gilts to corporate bonds "needs to be considered immediately given the need to take advantage of the market opportunity".

The £1.8bn (€2.1bn) Avon pension fund currently invests 5.5% in a passively-managed gilts mandate run by BGI, while 5.3% of the fund is in corporate bonds and actively-managed by Royal London Asset Management (RLAM), with a strategic target of 6% in gilts and 5% in corporate bonds.

The rationale given for the switch was to try and "capture the historically high spread of corporate bond yields over gilts yields", as the spreads had widened to reflect the expected increase in default rates on corporate debt and the current illiquidity in the market.

Although not all of the committee members were convinced by the argument, with one questioning the timing of the move and another the previous underperformance of RLAM, the committee agreed in a majority vote to accept the recommendation and to transfer 2% of the monies invested in gilts to the active bond portfolio.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email

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