The UK’s largest public pension fund returned 23.1% in the year to the end of March, driven mainly by strong equity market performance.

The return partly offset the impact of the Strathclyde Pension Fund having implemented the first phase of a new strategic asset allocation.

The Scottish fund grew in assets by £3.6bn to reach £19.7bn as at 31 March 2017.

Equity portfolios were the most significant contributors to the fund’s strong absolute performance, while property holdings contributed most on a relative basis.

Its equity investments returned 18.4%, according to figures in its unaudited annual report for 2016-17.

The Scottish local government pension scheme also benefitted from sterling’s depreciation in the wake of the UK’s vote to leave the European Union, as the majority of its holdings are overseas and their sterling value increased significantly.

Strathclyde is shifting away from equities in favour of a more broadly diversified strategy including private debt, emerging market debt, global credit, and UK infrastructure, the latter with a focus on renewable energy. 

The first phase of the asset allocation shift was completed over the past year. Changes included reducing the fund’s exposure to public equity and implementing revised regional and managed public equity allocations.

Its equity allocation fell from 72.9% to 68.6% as at the end of March. This is above the target level of 62.5% as a result of the strong performance in the equity markets. It is planning to reduce its equity allocation to 52.5% over two stages, and may in future consider further cuts.

It also increased its exposure to short-term “enhanced yield” strategies, from 6.6% to 8.3%. This was below the target of 15%.

Strathclyde asset allocation

Asset allocation against Step 1 targets

The pension fund used proceeds from equity sales to fund new multi-asset credit mandates run by Babson Capital and Oak Hill Advisors, an emerging market debt portfolio run by Ashmore Investment Management, and investment in an Alcentra direct lending fund and Babson global private loan funds.

It also amended its PIMCO absolute return strategy (PARS) mandate to move to a new PARS product, and sold nominal gilts that helped fund an increase in exposure to credit strategies.

The maximum capacity of the fund’s direct investment portfolio, which typically invests in illiquids, was increased to 5% of the fund’s net asset value.

During the past financial year Strathclyde agreed £120m in commitments for its direct investment portfolio, including £40m to a UK mid-market lending fund run by Pemberton.

Renewable energy (30%), infrastructure (25%), and credit (20%) make up 75% of the overall direct investment portfolio.

The total investment return of 23.1% represents the fund’s eighth consecutive year of investment growth.

Average annual return over the last year amounts to 11.8% per annum, ahead of the strategic benchmark’s return of 10.9%. The actuary’s long-term investment assumption is 4.9% per annum.