Hermes Fund Managers, the UK-based asset manager owned by the BT Pension Scheme (BTPS), is developing multi-asset solutions designed to deliver exposure to UK inflation and to improve the accessibility of illiquid private debt markets for its institutional clients, IPE has learned.

Global head of business development Harriet Steel said the firm was working with one of the UK’s leading pension consultants and a number of its institutional clients to create the products.

She added that these were part of an evolving business strategy that would see Hermes focusing on how it could improve the scalability of its key strengths.

“Hermes long ago decided it doesn’t want to try to be all things to all men,” Steel told IPE. “There are some very powerful incumbents in a lot of strategies, and we don’t want to be bumping up against them.

“Our real differentiator is the fact we are owned and backed by a pension fund, so we have given a lot of thought about how we can leverage that.

“How can we work with our owner to create access to certain types of investment returns that all except the most well-resourced find it difficult to access?”

Steel said a major part of the firm’s UK asset growth for the past two years had been in infrastructure equity.

Its owner’s direct-investment programme has been focused on large core assets with low leverage and high single-digit returns with a significant cashflow yield component.

Demand has been strong for a pooled vehicle that offers Hermes’ smaller clients a right to up to 20% of those assets, for which a second close is planned for mid-2014.

“There have been a lot of irrational buyers in infrastructure equity because it has been so hot, but the minute you move up the size-of-asset scale you get much less competition,” Steel said.

Steel said it was a natural move to extend that model, which informs Hermes’ co-investment programmes in infrastructure equity, private equity and real estate equity, into the private debt asset classes.

“There is a rotation going on within fixed income portfolios, and one of the key beneficiaries of that is going to be the different sources of illiquid private debt,” said Steel.

“We have launched a senior real estate debt strategy, we are looking very closely about how to access infrastructure debt and portfolios of loans or tranches of structures of bank capital to capture the European bank-deleveraging trade.

“We’d like to be able to put all of that together in a diversified structure that can be used to create portfolios that meet specific risk-and-return objectives for institutional clients, and we are discussing that with investors.”

The firm is in similar discussions with clients that have noted the degree of inflation exposure in many of Hermes’ specialist strategies.

“We looked at the multi-asset space in general – new balanced, DGFs, the American-style risk-parity, the bespoke LDI solutions,” said Steel.

“But [we felt we could best help with] partial portfolio solutions using multi-asset to get exposure to different sorts of risk premia.

“That is where the inflation idea came from – UK schemes enquiring about diversifying their inflation exposure beyond inflation-linked bonds and infrastructure.”

Hermes manages £26.3bn (€32bn) worth of assets for institutional and wholesale clients around the world.