UK – The investment industry is about to see the “cult of the alternative”, according to Hermes’ chief investment officer and deputy chief executive Nick Mustoe.
Speaking at a fund management conference in London yesterday, Mustoe said: “We have seen the cult of equities through the 80s and 90s. We have just gone through the cult of the bond, and we’re about to see the cult of the alternative.”
Mustoe told IPE: “Directionally, the advice we Hermes are giving is to increase allocation to alternatives.”
Hermes – the £64bn (€92.7bn) pensions management arm of the £35bn BT Pension Scheme – has already invested 2% of scheme assets in hedge funds. This amounts to roughly £600m, and there are plans to grow this allocation further.
Speaking on the sidelines of the conference, Mustoe said Hermes had cut out the funds of funds middleman and gone direct instead.
"I don't believe the funds of funds business is rocket science," he said.
This move has given added control regarding the types of managers selected and the investment strategies. It also gives access to new information, ideas and approaches.
“I kept peeling back the onion layers regarding fund of funds. You pay a huge amount but what are you actually getting? You are also not getting the access and information.” He added: “Even if costs were the same, I’d still go direct.”
However, the direct route is not one that many small to medium-sized schemes can afford to take as opposed to high-end pension funds.
The scheme has also allocated 3% to a broad basket of 24 commodities, 2% to private equity and 12% to real estate. Roughly 56% of scheme assets are in equities and a further 25% in bonds.
“Buying bonds is not the answer at the moment,” said Mustoe. “Alternatives do look attractive, and improve the asset mix of most schemes.”
According to the CIO, commodities can give “turbo returns if things go wrong for equity and bond markets”. They were also labelled “the ultimate insurance policy” and “a natural diversifier”.
“UK trustees need solutions. They are bombarded by complications and actuarial valuations, he said.
Other pension schemes can also invest in Hermes' hedge fund and commodity vehicle. "I've built a factory, and others can join the factory if they are prepared to buy into the BT model," added Mustoe.