UK - The £4.2bn (€5.3bn) J Sainsbury pension and death benefit scheme may have seen a fall in the value of its pension assets limited as officials altered its investment strategy in the last financial year to cope with swings in the bond and equity markets and replaced several managers to meet a stronger focus on liability management.

Details of the pension fund's annual report to 22 March 2008 revealed  there were several major changes to its strategy including the introduction of a rebalancing strategy - to rebalance the fund's assets should the fixed income portfolio asset allocation fall 2.5% below its strategy benchmark at the month end and equities likewise move in the opposite direction - as the new target asset allocation by 2011 is to hold 35% equities, 45% fixed income and 10% in alternatives such as hedge funds, private equity and property.

At the same time, Sainsbury made a liability-driven investment strategic move to tackle some of its interest rate risk, in part by sacking Capital International in favour of Legg Mason for the management of a smaller £50m emerging markets equity mandate and by replacing Goldman Sachs' Europe (ex UK) small cap equity mandate with a passively-run European smaller companies portfolio from State Street Global Advisors.

These strategic moves led the pension fund to rebalance its assets in April 2007 and February 2008 as on both occasions the bonds was underweight  by more than 2.5%, eventually shifting the bonds allocation from from 40.6% in March 2007 to 46.3% by 22 March 2008, while fixed interest swaps with a targeted notional value of £938m were purchased between January and March 2008 to cover the period between 2014 and 2022.

Equity allocations were also rebalanced a fraction as its Pacific Basin (ex Japan) holding was overweight by 25 basis points while a total of £225m was also withdrawn in cash from mandates with Allianz (£110m) and Blackrock (£115m), to be invested in a fourth passive bonds manager once one is appointed.

Bond derivatives were employed in the interim to provide necessary fixed income exposure and officials also increased the fund's global currency hedging from 50% to 100%.

All of this was done in part to reduce the risk to the fund's liabilities after managing to achieve a return of 11.77% annualised return to 31 December 2008 - 43 basis points above its benchmark, according to the annual report.

That said, given the rapid and wide movement in the markets, the pension fund has now decided to alter its annual reporting from a calendar year to the financial year, to better match the fund's accounting year.

On this basis, the fund had started the beginning of its 2007 year with assets of £4.293bn in assets under management, but fund performance delivered a negative return of -1.47% in the first quarter of 2008, reducing its annual return to 9.11% annualised return and dragging assets down to £4.164bn - a reduction in assets of £129m.

A further breakdown of gross returns shows UK and US equities produced negative returns of -7.7% and -9.5% respectively, and worst hit was Japanese equities with a 17.2% negative return from JP Morgan but European equities benefited from the strong Euro against sterling to deliver 1.8% return.

The overall bonds portfolio also produced a return of 4.1% against its 4.6% benchmark, thanks largely to index-linked bonds and hedge funds produced 1.8%, while inflation hedging swaps increased in value over the year by £45.8m.

In contrast, the fund's 4% allocation to property via Goodman Property Investors generated a negative return of -11.5% "as property values started to fall", said the fund, while its active currency overlay "had a disappointing year" and generate a negative -1.15%.

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