UK - Leicestershire County Council's pension fund management board is following the recommendation of its investment consultant and increasing its total returns strategy by moving out of government bonds.

A tender notice issued by the £2.18bn (€2.73bn) pension fund reveals the management board is looking to allocate £300m to a total return strategy, generating a target performance of LIBOR +3-5% per annum.

This move will be financed by removing the fund's exposure to gilts and index-linked bonds, as minutes of a meeting held on January 25 reveal the fund's strategic benchmark would move to 65% equity, 15% property and 20% targeted returns funds (TRFs) "quickly".

A review conducted of the pension fund suggested while gilt yields stood at 4.4% in January (the time of writing), "fair value for the long duration gilt yield is around 5.3%" so "any yield lower than that is thus not only expensive but of limited utility to the LCCPF".

"Current yields fall substantially short of the internal rate of return required of the scheme and any sustained allocation to the gilts market merely increases the ‘ask' demanded of the other assets held," said Leicestershire CC.

The first of those moves to rectify falling gilt yields has now been made, and Leicestershire is inviting total returns tenders to be submitted by noon on June 23.

To accommodate this new asset allocation strategy, officials will need to reduce the fund's equity holding from 70%, and increase the 10% property allocation, currently managed by Colliers, Morely and UBS, by 5 percentage points.

Further consideration was also being given at that time to increased exposure to Asia, especially if it allowed access to higher yielding returns on fixed income, but trimming of that equity exposure may come at the expense of "western markets" such as European equity holdings.

More importantly, a report submitted to pension fund management officials in January suggest these moves were being made because it was felt:

"In 10 years' time, we will likely:

look back with curiosity at the virtually zero inflation of recent years; wonder why anyone bought bonds at around 4%; find yields curves, once again, upward sloping; have dim memories of what a multi-year equity bull market felt like, and wish that we had bought more exposure in Asia (and the US$)."

Leicestershire CC moved into total returns in 2007, appointing Fauchier to manage a portfolio, along with an allocation to specialist absolute returns with Morley.

It is possible Leicestershire will now give Morley an additional allocation as a standalone investment as documents state "a subordinate recommendation would be increase the commitment to the Morley programme".

The board has since "reviewed that search exercise" and found "all of the managers featured in the latter stages of the exercise have come through the difficulties of 2007, H2 relatively unscathed" albeit they recognise "it would be completely incorrect to interpret TRFs as the ‘holy grial'".

Officials responsible for the Leicestershire County Council pension fund were unavailable for comment at the time of publication.

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