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ICI pension schemes award E100m to Muzinich

UK – An increasing number of UK pension schemes are allocating assets to high yield bonds, says investment manager Muzinich, which has just won mandates from two of chemicals group ICI’s pension funds.

Muzinich has just been appointed by the ICI pension funds and the ICI specialty chemicals pension fund to manage a combined 70 million pounds (100 million euros) in global high yield bond portfolios – their first allocation to the asset class.

An ICI pension fund spokesman said that most of the money for the investment had come from US equities.

“We have decided to invest in high yield bonds for their diversification benefits as much as their attractive expected returns. We believe that this is an efficient way of maintaining returns while reducing exposure to equity markets that are more and more correlated with one another,” he said.

According to Francis Paxton, head of institutional marketing at Muzinich, an increasing number of UK pension funds are considering high yield as an alternative to equities as they offer similar returns with less volatility.

“Since the late 1990s, equities have shown themselves to be fragile, with low returns and volatility and investors have had to focus attention on finding an asset class that generates the high returns of equities, with less volatility – and high yield has been identified.”

“High yield bonds have produced aggregate returns of 9% per annum, in line with the S&P 500,and has greater Sharpe ratio than any other major strategic investment.”

Paxton says that in the last couple of years, the image of “junk bonds” has slowly died down and that high yield is now becoming mainstream enough for funds to consider it. Consultants have also played a role in promoting the asset class. Watson Wyatt recommends an allocation of between 5% and 10% of return-seeking assets to the high yield area.

The UK pension schemes of BUPA, P&O, Syngenta, and Midland Independent Newspapers have also all recently chosen to switch some assets out of equities into high yield. Muzinich runs high yield portfolios for all of them.

It is not only in the UK that schemes are warming to high yield investments, adds Paxton. In Germany and Scandinavia, Muzinich has also seen recent increased interest and mandate wins from schemes moving into high yield.

Muzinich manages 4.2 billion dollars (3.74 billion euros) in high yield assets.

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