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​EAPF prioritises private debt over hedge funds in alternatives push

The Environment Agency Pension Fund (EAPF) is to grow its alternatives exposure in an effort to reduce the level of equity risk in its portfolio.

As part of an attempt to “stabilise and ideally reduce” the level of contributions paid by its sponsor, the £2.6bn (€3.7bn) fund said it reviewed its investment strategy to better understand sources of investment risk.

It found that its portfolio was “dominated” by equity risk – with listed and private equity able to account for up to 70% of assets – and that it would need to diversify further into alternatives, in the absence of viable returns from fixed income.

It said its allocation to real assets, which stands at £230m, already fit into the alternatives category and that the category would need to be broadened.


“Investment in hedge funds and commodities was considered,” the fund’s 2014-15 annual report says, “but these were not felt to comply with our investment principles and our focus on long term, responsible investment. In contrast, illiquid credit/private debt is seen as an appropriate and worthwhile area.”

The new allocation to illiquid credit and private debt is to be funded by cutting the equity portfolio’s size by 10%.

The report says part of the fund’s UK passive equity portfolio – likely to be worth £140m and managed by Legal & General since 2007 – had already been sold as part of the shift.

The EAPF also recategorised a £150m stake in a Wellington total return bond fund as part of the growth fixed income portfolio, almost immediately meeting the 6% upper limit for the portfolio laid out in the revised Statement of Investment Principles (SIP).

The allocation to Wellington was itself only put in place in March this year, after the EAPF liquidated its holdings in the PIMCO unconstrained bond fund due to what it saw as “considerable team instability” – namely, the departure of company co-founder Bill Gross and others.

It also recategorised its previous £6.6m stake in a Generation Investment Management credit feeder fund as part of the private debt portfolio, seeding the manager with a further £30m to show its commitment to the area.

Under its revised SIP, the fund will allocate up to 60% to equity – split among global equity, emerging markets and private equity – while maintaining its current allocation for real assets at no more than 25%.

Illiquid credit and private debt could now range from zero to 8% of the portfolio, while growth fixed income could account for up to 6%. 

The fund also decided to lower its maximum exposure to corporate bonds by 3 percentage points to 25%. 

For the financial year 2014-15, the fund returned 15.1%, just ahead of its internal benchmark, lifting its three-year annualised return to 12.3%. 

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