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IPE special report May 2018

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Private equity drives 15% return at West Midlands Pension Fund

The £11.4bn (€15.9bn) West Midlands Pension Fund reported an annual investment return of 15.1% after the fund sold its commodities and hedge fund portfolios.

The local government pension scheme for public sector workers in Birmingham and the surrounding area saw strong returns across its growth assets, dragged down slightly by fixed income allocations.

The fund’s 12% allocation to private equity returned 24.6% over the year – the best-performing asset class.

The scheme manages assets predominantly in-house, including its passive UK equity, overseas equity, active global equity, private equity and fixed income allocations, with other non-equity assets managed externally.

As one of several LGPS funds managing assets – and active equity allocations – in-house, the scheme would be affected by government proposals to force listed assets into common investment vehicles, with some peers considering legal action.

The fund’s 45.9% allocation to listed equities provided a 14.9% return overall, with strong performance from Japanese, North American and global holdings, which each returning more than 20%.

Its 6.3% allocation to absolute return strategies also fared well, providing a 20.2% return, with assistant director for investment, Mark Chaloner, singling out insurance-linked funds for praise.

The scheme’s 22.7% allocation to fixed income produced a positive return but underperformed the benchmark.

Chaloner described the 13.8% return as “strong”, attributing the underperformance to the 2.6% allocation to emerging market debt and specialist fixed interest funds.

The scheme has a 9.2% allocation to property, with direct holdings providing a 12.8% return.

However, indirect holdings – mainly in overseas markets – provided a “dull” 8.8% return.

The pension fund sold out of its £190m allocation to commodities and £200m hedge funds, with the former losing 12.2% over the period. 

In February, the fund said it was divesting its £200m allocation to hedge funds to build underweight assets to benchmark allocations.

Overall, the scheme increased in size from £10.1bn to £11.4bn after strong investment returns and positive inflows from the scheme’s active membership.

The scheme now provides pensions for 277,500 current and former public sector workers, with contributions from more than 100,000.

The scheme has produced annualised returns of 10.2% over three years and 7.9% over 10.

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