UK – The £3.8bn pension scheme of retailer Sainsbury plans to invest 5% in commodities by the end of June 2006.

“We will do it,” said Sainsbury pensions investments controller Chris Armitage on the sidelines of the ‘Portfolio Diversification: Commodities’ conference in London today.

The commodities will be actively traded funds, due to be managed through a fund of funds route.

The scheme – which has a roughly £300 to £400m FRS17 deficit – has until this point had a traditional 60/40 equity/bond split.

The new target exposure is as follows: 5% commodities; 5% currencies; 4% property; 3% hedge funds; 6% private equity; 35% bonds; and 55% equities.

“The way we invest may be slightly ahead of some mainstream thinking. But we are a conservative fund,” maintained Armitage.

He also told trustees: “Let’s not be frightened of investing in_commodities. If it’s a good idea, let’s do it.”

According to Armitage, there is still “bonkers of space” in the commodities market, with very little heavy institutional investment.

The advantages of commodities include a low correlation with other assets, and a negative correlation with equities, increasing over time. The asset class also has relatively high expected returns, provides a hedge against inflation, and good liquidity.

Also speaking at the event, Watson Wyatt senior investment consultant Robert Brown told delegates that between £500m and £1bn of client money has been invested in commodities. However, this still only represents less than 1%.

“Commodities are still a minority sport,” said Brown. He added there is low investment in commodities because, amongst others, trustees “have a lot on their plates” at present. This includes underfunding, pressure from corporate sponsors and increasing responsibilities.

“Trustees probably find them commodities interesting, but generally have bigger fish to fry,” he said. However, he stated commodities could play an important part if rolled into a diverse portfolio of growth assets.

According to Brown, a modest 5% allocation to commodities is needed – any lower is considered “rather immaterial”.