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LPFA considers 'market-neutral' pensions strategy

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UK - London Pension Funds Authority officers are hoping to shift the strategy of its pension assets to a more market-neutral position, and may opt for a larger allocation to infrastructure.

Vanessa James, investment director at LPFA, told delegates at the Institutional Fund Management conference in Geneva the authority is currently going through its triennial review and considering a change in investment strategy which places a higher level of assets in alternative strategies to hedge liabilities.

"All of our global equity managers have a +2% mandate. But our three-year review is due and we are moving away from that structure," said James.

"These are only ideas at present, and still need approval, but I would expect we would put some more money into global infrastructure, such as [private finance initiative]-type investments in the UK. We are going to be looking to put more into a pot of money which is part in global beta and then if we see some opportunistic ideas we could something with that money."

Her comments on the £3.6bn (€4.85bn) fund's strategy were made in a panel discussion asking how pension funds should structure their portfolios to maximise alpha, optimise beta returns and match liabilities, and which also asked at whether pension funds were investing in hedge fund strategies.

"We are looking for some other sources of alpha. We have come to the conclusion that the way to look at this is to use our contacts and networks and look at the experience of what others have done [with hedge funds]. From a theoretical perspective, we don't need more beta so we will try to be market-neutral," she added.

While the fund's asset allocation is currently split as 65% in equities and 20% in ‘target return' strategies - with two managers who adopt a number of hedge fund strategies considered "acceptable" to trustees in terms of fee levels and transparency - the remaining 15% is in what James prefers to describe as ‘non-public equity in active sub-funds' rather than alternatives.

Of this 15%, 5% is in private equity, 7% is in real estate - now largely global property after shifting from a UK-centric position last year - while 3% is currently in infrastructure and commodities, and there is a 50% passive currency hedge and overlay mandate as "nowhere else do you split alpha and beta," suggested James.

There is currently no hedge fund exposure, said James, because the fund has found it difficult to assess which is the most appropriate investment route given the scale of the market and its reduced transparency.

"Where do you make a start and find out within this huge universe what would be a good strategy?" she said.

LPFA has already made changes to its processes within the last year, according to James, which allow officials to make faster investment selections. All investment decisions are now made by an investment committee, rather than the entire trustee board, and this committee can be convened "fairly rapidly when needed".

That said, any changes to the investment strategy will not be made immediately as the fund is now going through its triennial assessment.

LPFA manages the collective pensions assets of 73,000 members from several London borough public authorities.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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