UK - The £1.04bn (€1.14bn) North Yorkshire Pension Fund has formally withdrawn its investment in a Global Tactical Asset Allocation (GTAA) strategy run by UBS, and from the asset class as a whole.
UBS held a 4% allocation to GTAA but following continued underperformance the manager was instructed to suspend trading in July 2009. For the years to June 2008 and June 2009 returns were 19.1% and 54.4% below the benchmark respectively.
North Yorkshire noted in documents presented at the latest meeting of the pension fund committee last week that the results have “generally been as a result of very poor performance from the [Market Absolute Returns Strategies] fund mitigated to a degree by positive returns from the [Currency Absolute Returns Strategies] fund. Although performance recovered strongly in the June 2009 quarter, the monetary effect was small.”
Aspokesman for the pension fund confirmed that the council had therefore agreed at the meeting to formally withdraw from UBS and GTAA as an asset class because of a “combination of underperformance and change to key personnel”.
The pension fund, valued at £1.04bn at the end of July, currently has a target allocation of 23% bonds and 77% equities, which included the 4% allocation to GTAA. The council said it intended to keep to this “fundamental split of the portfolio”, however, the appointment of ING as property manager earlier in the year will see the overall equity allocation reduced in favour of the new asset class.
North Yorkshire noted that a specific allocation to property had not yet been decided so it has not been funded, although the cash will come from the disinvestment from the GTAA mandate. But it is expected the investment will be between 4-5% of the fund reducing the equity allocation to around 72%.
The scheme is not the only pension fund to be examining its GTAA investments, as the Brent Council pension fund is also planning to review its allocation, along with its fixed interest and global equity mandates, at the end of the third quarter.
It noted in a committee meeting in March that it was concerned by the poor performance of these mandates, “particularly in the case of the GTAA mandate” run by Mellon. However, it agreed the current arrangements would remain in place “to be reviewed on the basis of performance recorded at the end of the third quarter, ending 30 September 2009”.
Concerns over the use of GTAA strategies is not limited to local authorities, however, as Watson Wyatt revealed there has been a gradual move away from the asset class across the pension market as a whole.
Matthew Roberts, investment consultant at Watson Wyatt, said: “We’ve seen a reasonably significant reduction in interest in GTAA from our clients. That’s partly due to a view from ourselves that we’ve been communicating to our clients over the last few years.”
He said the two main reasons for this is the high amount of leverage that can be found within some GTAA products, which can lead to significant drawdown when combined with other factors. The second concern is the high fees charged by some managers - usually around 2% of standard charge and a 20% of performance fee for standard absolute return vehicles - when they are “effectively hedge funds and should be compared to these strategies”.
Roberts said: “We have advised our clients to reduce the risk allocated to these strategies. We have not had a huge amount of GTAA exposure across our client base, but the exposure we have had has been diminishing gradually over the last two years.”
Instead of GTAA, some pension clients have been moving to other hedge fund products, although Roberts warned this is only suitable for schemes with the proper governance arrangements in place to monitor anything up to 15 or 20 hedge fund managers otherwise they should stay clear and look at simpler investment strategies.
“Historically, schemes - particularly local authorities as I understand it - allocated 5-10% to an individual GTAA manager. Given concerns over leverage and fees you should diversify hedge fund exposure more broadly to a number of managers - depending on the size of the scheme - but definitely more than just one”, he said.
Roberts pointed out: “There are a wide range of diversifying asset classes out there, such as a broad approach to emerging market wealth through debt, currency and equities, this could be an appealing alternative to hiring a single GTAA manager.”
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