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£8.6bn public sector fund appoints managers for equity protection

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The Merseyside Pension Fund has appointed five managers to help it run equity overlays to protect its stock market exposure against a downturn.

According to publicly available documents, the £8.6bn (€10bn) pension fund has appointed Eaton Vance, Insight Investment, Legal & General Investment Management, River & Mercantile and Schroders to a panel that will advise on risk management design and construction.

The document said Merseyside was “seeking to control equity risk on a medium-term basis” – roughly 18 months – “and possibly on a longer term strategic basis through the use of an equity overlay solution”.

In the financial year 2017-18 “the potential for the fund to implement equity protection strategies was identified as an area of development”, according to its annual report.

At the end of March 2018, Merseyside had roughly 40% of its portfolio – £3.4bn – invested in UK and international equities, either directly or through pooled funds.

Today’s announcement did not contain detail on how much of the portfolio would be covered by the overlay.

The move by Merseyside follows recent moves by other local authority pension funds – including Tower Hamlets, South Yorkshire and Worcestershire – to employ similar strategies. Each appointed at least one of the group brought in by Merseyside to run a specific mandate.

Merseyside stated: “This opportunity is to identify providers capable of supporting Merseyside with their equity overlay needs, which may range from basic put protection through to more complex strategies (eg put-spread collar or other such structures).”

Initially the exercise will focus on selection of a single or multiple managers to provide a put-spread “collar” with a preference for a cost-neutral solution, the document said. However, managers should be able to offer a customised approach to fit a range of different plan requirements.

Merseyside forms part of the Northern LGPS pool alongside Greater Manchester and West Yorkshire. Together, the pool has assets of around £45bn.

All the managers appointed by Merseyside were contacted for comment.

Further reading

Investors ‘must research equity overlays’ as demand soars: Bfinance
The prospect of severe downturns has bolstered the case for more explicit safeguards on investment portfolios, but equity protection strategies involve several critical – and complex – choices

PGB implements protection strategy for €12bn equity portfolio
The Dutch multi-sector pension fund appointed BMO Global Asset Management to implement an protection strategy in December 2018

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Readers' comments (1)

  • I'm all in favour of people being smart investors (e.g. using the "free lunch" of diversification), but I do think it's sometimes a little too tempting to be too "smart".

    It seems like they're saying: "We love the higher expected return of equities, but all that potential volatility is not really our cup of tea!"

    If they have a medium term need for cash (to pay pensions), perhaps they really ought to be in cash in the short term?

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