An ageing membership base has forced the pension fund of Spain’s Telefónica to opt for exposure to alternative beta strategies over illiquid holdings in private equity and hedge funds, according to its CIO Jaime Martinez-Gómez.

The €3bn fund currently invests in commodities, hedge funds and real estate, with private equity investments accounting for the largest share of its alternatives portfolio.

However, Martinez-Gómez, speaking with IPE in the December issue of How We Run Our Money, said the allocation would be changing – with the 5.5% exposure to private equity gradually reduced to 3% over the coming three years.

The scheme will keep its overall alternatives exposure steady at 15% of assets.

Martinez-Gómez said the “maturing” nature of the defined contribution (DC) fund required it to reduce its illiquid exposure over the long term.

“We want to focus on a more liquid portfolio instead,” he said. “Hence, we are committing less to private equity and are increasingly moving into fewer illiquid strategies.”

However, he said the current 2.5% exposure in real estate would be maintained, while the share of direct hedge fund holdings would be reduced.

“Instead of adding more hedge fund vehicles, we are trying to increase our exposure to alternatives though what we call an alternative beta portfolio,” he said.

He said the strategy should, in theory, allow it to “harvest” the risk premium of the commodities and volatility curves.

“This should generate higher returns in comparison with the traditional assets in the current low-yield environment,” he said, “especially as we are aware of the fact equity returns cannot continue their good run forever.”

Martinez-Gómez also said that, following changes to the fund’s investment mandate in early 2013, he was now able to integrate socially responsible investment (SRI) policies into the equity portfolio’s investment decisions.

“This is the first time we have an explicit mandate from our trustees to integrate SRI policies, which led to a major change in the investment policy,” he said.

“We are currently working on this integration, but most of it will be done next year.”

For more on Telefónica, see How We Run Our Money in the current issue of IPE