UK - Dorset County Council Pension Fund has been advised to increase the assets run by its internal UK equity manager by £30m (€32m), to pull its overall UK equities portfolio back towards the strategic target allocation.

At the latest meeting of the council's pension fund investment committee, a report presented by the investment advisers revealed the scheme had maintained a "high cash position" over the last year, but had not made any additional allocations to any of the asset classes.

Allenbridge EPIC Investment Advisers (AEIA) told committee members because of the market turmoil and a fall in value in most asset classes the high cash balance had resulted in the portfolio being "broadly in line" with the strategic allocation.

That said, the report highlighted the UK equities portfolio at November 2008 was only 26% of the fund, and recommended investing £30m of the cash position into UK equities to move it closer to the target allocation of 30%.

Dorset Council's pension fund currently has four external active UK equity managers and one internal passive manager, and although the fund had the option of splitting the money between all five to maintain the existing passive/active split, committee members were recommended to place all the additional cash with the internal manager.

AEIA said this is because "investing small amounts in each of the four funds will be costly, generating extra transaction costs" while in the current climate "active managers have struggled to achieve performance in line with the index, and this combined with the increased risks from investing this way makes active funds a less attractive opportunity at the moment".

The pension committee was meanwhile also recommended to closely monitor three of its fund managers - Auriel Capital Management, Pioneer and Gottex - in the next few months.

Gottex, which was re-appointed as a hedge fund manager by the scheme in September 2008, has come under scrutiny after it told the scheme of problems with investments made by an underlying fund in the US company Petters Group, which is being investigated by the FBI for alleged fraud.

The report noted Gottex does not have any direct investments in the company, however the Market Neutral Fund in which Dorset invests has 2.5% exposure through underlying funds, and the FBI investigation could potentially mean the investment is "written down to zero".

Although AEIA admitted Gottex could not have been expected to know about the potential fraud, the report noted "it does raise some questions over the due diligence process in making investments in underlying funds".

Members of the committee were advised while the issue does not "devalue" the reasons for reappointing Gottex earlier in 2008, "it would be sensible to monitor the situation closely over the next few months, and formally review in 2009, as previously agreed".

Pioneer, which was reappointed as a hedge fund manager last year with a formal review in 2011, has also been flagged to the committee after several of the fund management team left Pioneer, including two of the founders of the 'All Weather' fund in which Dorset invests.

Following reassurances from the firm that the departures should have a minimal effect on the pension fund's investment, the committee was advised to keep the funds in place but to bring forward the review of the appointment forward to after one year, instead of three.
In addition, Auriel - which was appointed to run a currency mandate in February 2008 - was pointed out by the advisers to the fund as the portfolio is managed using currency futures and - until its collapse - the prime broker or counterparty had been Lehman Brothers. (See earlier IPE article: Dorset splits £35m active currency mandate)

Under the terms of the transactions, Auriel had 18% of the portfolio in an account with Lehman Brothers, which has now been frozen, and although appropriate claims have been made with administrators, the cash effect on the Dorset pension fund is £2m.

This was followed by issues with the mathematical models used by Auriel in its investment strategy which led to them closing all outstanding positions and ceasing trading in September, and not re-starting until 21 October.

Members were advised to accept the recommendation that "as a result of these recent concerns that investments remain with Auriel, and that they are monitored closely over the next six months".

Latest figures produced at the committee meeting in November also revealed the value of the pension fund had dropped from £1.34bn at 31 March 2008 to £1.21bn at the end of September, with the significant underperformance - relative to the benchmark - from investments in bonds and property.

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