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Berkshire diversifies away from equities

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UK - The Royal County of Berkshire Pension Fund is implementing a new risk management and diversification investment strategy, which involves moving away from its current target allocation of 70% equities.

The release of five new tender notices showed the local government pension fund is seeking managers to run portfolios for global indirect property; active currency; high yield debt; absolute return and commodities.

This is in addition to the two searches started yesterday for managers to run an infrastructure and an emerging market debt portfolio. (See earlier IPE article: Berkshire to increase alternatives exposure)

The £1.49bn (€1.88bn) pension fund revealed it is looking to award a £70m segregated global indirect property portfolio to an active manager, who will also be expected to advise - but not manage - the UK indirect property portfolio.

In addition, the Royal Borough of Windsor and Maidenhead - as the administering authority for the pension fund - is tendering a £60m high yield debt mandate - hedged into sterling - as well as a £50m investment in active currency through one or more funds.

The pension fund is also seeking a manager for an absolute return portfolio, valued at £105m, which requires the successful manager to invest in hedge funds to achieve a target return of LIBOR +3% - 6% on a segregated account basis, while the manager would also have to independently price the underlying assets through a managed account platform. 

However, the largest tender is reserved for a "well-diversified" commodities portfolio, which is valued at around £150m, and is expected to be broadly equal weighted across the agricultural, industrial metals, precious metals, and energy.

All five mandates have an initial contract period of three years, although the pension fund has the option to extend it annually for a further three years "subject to satisfactory performance".

Nick Greenwood, pension fund manager at the Berkshire scheme, said the changes were the results of its risk management process and the decision to adopt a diversification strategy, as members had been uncomfortable with the volatility arising from the previous asset allocation, which was dominated by 70% in equities.

He said the scheme is "seeing what the opportunities are" and confirmed, "subject to market conditions when we finish this process, we expect to see most, if not all of these mandates being adopted".

The scheme had decided to wait to review its asset allocation mix until after the results of the latest triennial valuation - received in December 2007 - and has since completed an Asset Liability Modelling (ALM) study, with the resulting decision to tender the contracts approved by the pension fund panel.

Greenwood added: "None of these asset classes are brand new, they are all well-established investment opportunities. We are now going out to see what's available and hopefully we will have a broadly diversified fund in place by next year."

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 nyree.stewart@ipe.com

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