Strong performance from listed infrastructure and timber holdings saw Lothian Pension Fund return 16.5% last year, exceeding its benchmark by several percentage points.
However, despite the strong performance, the £4.4bn (€5.3bn) local government scheme saw its funding ratio fall by 7 percentage points to around 84% at the end of March, as asset returns failed to keep step with liabilities.
In an annual investment update prepared for the City of Edinburgh’s pensions committee, the fund noted its 16.6% return outperforming the benchmark despite a number of investment strategy changes being implemented over the course of the financial year.
One of the changes included bringing a £300m equity portfolio in-house, which it announced in March, and comes as the scheme shifts its in-house staff to a standalone company registered with the Financial Conduct Authority.
Lothian said its equity holdings returned 16.1% over the course of the year, as both developed and emerging markets saw strong results when measured in sterling.
It also noted strong results from its index-linked Gilt portfolio, which returned 23% but coincided with an increase in liabilities, and a 13% return from its alternatives holdings.
“Within alternatives, the bond portfolio generated very strong returns of 28%, while the timber assets returned 25% and listed infrastructure returned 23%,” it said.
“These standouts were offset by lower returns from other real assets, which returned 7%, held back by the write-down of a troubled infrastructure fund.”
While the report did not name the infrastructure fund in question, it noted that its exposure to the asset class as a whole remained static over the course of the year despite strong distributions and several other investments due to the one “disappointing” fund.
At the end of March, Lothian was slightly overweight equities, accounting for 69.1% of assets, with a further 6.1% in index-linked assets and 21% in alternatives.
It has returned 8.9% per annum over the last decade, 1.3 percentage points above benchmark.