UK - The Leicester local authority pension fund is to seek exposure to the global credit market following disappointing returns on UK corporate bonds.

The scheme is looking to appoint an active global credit manager in the next few months for an open-ended mandate initially worth £70-80m (€78-89m), around 3% of the scheme's overall portfolio, although the eventual size of the allocation will depend on the market.

According to the tender document, the expected return of the mandate will be "subject to discussion".

Specifically, the scheme is looking for a diversified credit portfolio with limited use of leverage - most likely, bonds.

However, the scheme stressed there were no a priori restrictions on asset categories, no minimum allocations to specific types of bond and no limit on potential holdings in distressed assets.

Although the focus of the mandate is on credit instruments - that is, excluding government bonds - investment manager Colin Pratt said there would be scope to invest in sovereign bonds if it "makes sense in two or three years' time".

He added: "The mandate has been deliberately structured to give the manager freedom to invest where there is value at any point in time. If you're relying on the skill of managers, it doesn't make sense to limit where they can invest."

Hedge funds and LIBOR-plus vehicles, which limit duration but also yield, are unlikely to be appropriate for the mandate.  

The mandate further stipulates that 80% of the portfolio should remain liquid "in normal circumstances".

Pratt said the scheme did not want to be left with non-tradable assets in the event of a re-run of the 2007-08 economic crisis.

This expansion into global credit comes as a bid to expand the scheme's existing exposure to UK corporate bonds, which have fallen significantly in value.

"There's less value than there was, so we're moving away from bog-standard UK corporate bonds," said Pratt. "There will always be value at some point of the market at some point, but the outlook for UK bonds now is at best lacklustre."

The open-ended contract is expected to last "until the manager or the asset class are no longer attractive".