The £6.3bn (€8.6bn) South Yorkshire Pension Fund (SYPF) returned 14% up to April 2015, despite its changing exposure to short-duration bonds hampering its return strategy.
The pension fund for public sector workers in the south of Yorkshire began shifting towards a short-duration bond strategy over concerns a rise in interest rates would significantly affect asset valuation.
The local government pension scheme’s (LGPS) 14.2% return was 20 basis points below its benchmark after fixed interest bonds and property, which returned 18.5% and 13.1% respectively, were not as buoyant as expected.
Its overall return was significantly higher than the 5.7% seen in 2013/14.
John Hattersley, fund director at South Yorkshire Pensions Authority (SYPA), which runs investments and administration for the scheme, said the fund’s pursuit of short-duration bonds had affected the overall performance.
However, he added: “[The scheme was] mindful of the detrimental effects lower yields were having on the deficit, but also well aware of the potential capital loss of an increase in yields to overall return.’
The scheme’s best results came from its US and Japanese equity holdings, which returned 25.3% and 24.9% respectively, while falling short of benchmark targets.
North American equities accounted for a third of the 41% international equities bucket, with Japanese holdings claiming an 8% share of the international portfolio.
UK equities, which account for 19.1% in assets, returned an above benchmark 7.1% over 12 months to March, with the scheme adding a low-volatility strategy during the year.
Its 2.3% absolute return strategy returned 8.8%, five percentage points above the benchmark.
However, this did not stop the scheme agreeing to reduce its allocation to the strategy in favour of more “specialist and income orientated vehicles”, which Hattersley said would be introduced this year.
The 20.4% fixed income portfolio, the majority of which is invested in UK index-linked bonds and a quarter in corporate bonds, returned 18.5%.
Hattersley said SYPF had nevertheless decided to overhaul from its conventional corporate bond strategy, and move towards a more suitable buy-and-maintain strategy, overseen by Royal London Asset Management.
A 4.3% allocation to private equity returned 19.3%, well above its 2.4% benchmark.
Real estate returned 13.1%, 3.8 percentage points below benchmark, and accounted for 10.8% of the fund’s portfolio.
“The Fund’s commercial real estate portfolio performed well,” Hattersley said, “although the overall property return suffered because of a disappointing agricultural valuation and the adverse currency effect on the European fund holdings.”
The scheme did not change asset allocation radically over the year, however, it will now move to a new customised benchmark after it underwent an asset and liability review.