UK - The £680m (€991.9m) Devonport Royal Dockyard Pension Trustees Ltd. pension fund has made its first investment in swaps and futures, appointing PIMCO Europe to manage a £105m bond mandate.
The appointment followed a review conducted by the board of trustees and Mercer Human Resource Consulting and ended up with the money, previously passively managed by custodian HSBC, being transferred to an asset manager for active management.
PIMCO competed with five managers, but in the latest stage, trustees have considered two candidates, pension manager Neil Skinner told IPE.
He explained PIMCO “sold” their management idea to the trustees, who wanted to reduce US equity exposure and enhance investments in bonds but also required an active strategy.
The mandate will be benchmarked against a combination of fixed interest, index-linked and corporate bonds. PIMCO said it sought excess returns of 1.5%, relative to the benchmark.
Paul Craven, PIMCO’s head of UK institutional business development, said UK pension funds are slowly becoming to make their bond investments work “harder and smarter”.
Traditionally pension schemes expected 0.5% to three quarters of a point above benchmark returns, they now start to eye 1% to 1.5% returns, he said.
“We believe in the full fixed-income tool kit. There is a lot of tools in the bag and PIMCO believes is using them all,” Craven said, adding that PIMCO has been awarded similar mandates with other pension schemes, but declined to name them.
PIMCO’s appointment became effective on April 1. The portfolio structure comprises a strategic allocation to UK gilts and corporate debt and will be accompanied with tactical strategy including exposure to derivatives, overseas government bonds, emerging markets debt and high yield.
Craven, however, stresses derivatives will not be used to leverage the portfolio, but as a “flexible tool”.
The fund’s Skinner said the asset management roster has not undergone any further alteration, he added.
According to ‘International Pension Funds and their Advisors’, Devonport employs Capital International, Fidelity Investments, Societe Generale Asset Management UK Ltd. and Henderson Global Investors.