The UK’s £16bn (€20.5bn) Strathclyde Pension Fund is aiming to invest £200m-300m in emerging market debt and increase its exposure to credit, steps that will largely complete an initial overhaul of its strategic asset allocation.
The pension fund will also invest £30m in a core infrastructure fund.
A spokesperson confirmed the Strathclyde Pension Fund Committee approved the changes yesterday.
The decisions largely complete an initial overhaul of the pension fund’s investment strategy, designed to increase diversification.
This was agreed last year, with the pension fund having considered several alternative strategies, all involving a large cut to its equity exposure and increased allocations to short and long-term “enhanced yield” strategies.
The strategy it decided on for immediate implementation, dubbed “Alt 1” in committee papers, involves the smallest reduction in equities and the smallest increase to enhanced yield allocations.
It has already taken several steps in the implementation of this strategy, having recently decided on multi-asset credit mandates, for example; it has achieved a 15% target allocation to long-term enhanced yield.
Yesterday, the committee approved a proposal for the pension fund to “initiate a process to source emerging market debt investments of around £200m-300m”.
An allocation of 2% would achieve the target of a 15% exposure to short-term enhanced yield (STEY) under the new investment strategy, according to a committee paper.
The pension fund will take a blended approach to the investments by “diversifying exposure across hard currency sovereign debt and corporates, and local currency sovereign debt”.
Attractive relative value, diversification and “reasonable” absolute returns are cited as the reasons for the pension fund’s wanting to make this allocation to the asset class.
Separately, the committee approved new hedging/insurance and credit allocations, involving increased corporate bond exposure.
Strathclyde Pension Fund currently has a 2% allocation to Gilts (1.4% index linked and 0.6% nominal) and a 3.6% allocation to credit, via sterling corporate bonds.
The new asset allocation largely maintains exposure to index-linked Gilts but exits nominal Gilts and reduces the allocation to sterling corporate bonds by 0.6 percentage points, introducing a 3% allocation to US corporate bonds, hedged to sterling.
According to a committee paper, Strathclyde’s desire for enhanced returns and more diversification led to the new asset allocation.
The paper also proposes using funds offered by Legal & General, the pension fund’s passive bond manager.
The pension fund committee approved a £30m investment in a core infrastructure fund run by Equitix.
The investment will be made via the pension fund’s direct investment portfolio (DIP), and is for the fourth fund being built by Equitix.
Like the other Equitix funds, Equitix Fund IV focuses on core infrastructure assets.
The final close will happen by the end of July, with a total investment target of £500m.
In a paper prepared for yesterday’s committee meeting, the £30m investment is described as “appropriate both as a proportion of DIP and in the context of the total size of Equitix Fund IV”.
Strathclyde’s DIP has a total capacity of £780m; the approved £30m investment in Equitix Fund IV will reduce the headroom as percentage of commitments to £140m.
The committee meeting paper notes that infrastructure development and investment is “one of the key areas of focus for the DIP” and contributes to the long-term enhanced yield allocation under the pension fund’s revised investment strategy.
“That allocation,” the paper reads, “is currently slightly overweight, but, in relative terms, this individual proposal [to invest £30m in Equitix Fund IV] would not materially increase that overweight allocation, and there are a number of positive factors that justify taking it forward.”
It addresses issues such as the environmental, social and governance (ESG) policy of the Equitix fund and the team managing it, and notes that the previous Equitix funds have performed very strongly.
Councillor Philip Braat, chair of the Strathclyde Pension Fund Committee, said: “Our first concern is always to get a good return for our members, who, after all, join the fund because they want to save for their retirement.
“However, this is also the kind of investment that can let their savings have a positive impact in their own community.
“Good, modern infrastructure – whether it is a new school or improved recycling facilities – not only makes them better places in which to live and work but creates jobs and further investment.”