UK - Aviva's asset management arm Morley has launched a multi-asset fund targeted at smaller UK pension funds but which it hopes to be able to roll out across Europe in due course.

Known as the Diversified Strategy fund, this latest proposition is said to give smaller pension funds of up to £200m in assets under management, and which tend to invest in balanced funds, the ability to diversify its asset allocation in the same way as larger pension funds would seek to do, to give the funds increased risk and returns security.

At this stage, access to the fund is only available to UK investors as a result of its non-Ucits retail scheme (NURS) structure - and cannot therefore be sold cross-border - but the firm hopes regulatory changes will eventually allow the fund holding property to be registered as either NURS or Ucits, making it easier to distribute across Europe.

Under the current regulatory framework, funds holding property tend to be registered in Luxembourg as a non-Ucits SICAV as terms of Ucits' regulation mean they cannot hold direct ‘bricks and mortar' investments.

Paul Moody, head of investment development at Morley, says European legislation is the stumbling block which prevents it from widening its appeal to other European countries, but it is hoped this will change.

"We will look to introduce it across Europe in the future. It is set up with a NURS structure because it is slightly more flexible and holds property as well as a high weighting of hedge funds. At this stage it is NURS, but we expect it will be possible to do it eventually either through NURS or UCITS once reforms are introduced," said Moody.

The fund is essentially an extended form of a balanced fund as it has the ability to invest in most assets - equities, bonds, property, hedge funds, infrastructure and derivatives - so the firm is recommending existing pension funds clients move into it for diversification purposes, according to Moody.

"The dilemma for all pension schemes is they want equity returns but don't want equity risk. Typically, you get above 4% over cash for the risk of holding equities. If you look at the next five years, longer-term this would simply reflect the yield you get on the portfolio," he said.

"We wouldn't expect to be delivering 5% over cash when we currently have 6% Libor, you might expect [returns of] 9 3/4% longer-term but we expect interest rates to come down.

"But we expect all of our clients in balanced funds to move across to this. We are trying to be transparent about the way the fund is run, so it is good we have the academic and empirical evidence to back it up," continued Moody.

Morley, like many consultancy firms, notes academic evidence indicates 90% of returns come from asset allocation and just 10% of the return is down to manager selection. As a result, the fund has no benchmark constraints and could potentially have zero weighting in equity if managers felt this was the most enhanced route for risk diversification and potential return.

Larger pension funds would need to put in additional work with their consultants if they chose to invest through segregated mandates, Moody acknowledged, as they would need to ensure they meet their overall asset allocation target.

A shift to multi-asset funds is the latest development targeted at pension funds, according to Moody, in part because these smaller funds need the ability to diversify their liabilities, perhaps through swaps, but find the cost and risk of diversifying too high so there is interest in its proposition.

Likewise, Baring Asset Management has already won mandates with combined assets of £500m (€713m) in 2007, from pension fund and institutional investors seeking to invest in its Dynamic Asset Allocation and Extended Risk funds.

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