The Strathclyde Pension Fund may radically reduce its equity holdings for a more diversified portfolio with allocations to short and long-term “enhanced yield” strategies.

The UK’s largest local government pension scheme (LGPS) at £14.9bn (€19bn) currently holds over 70% of its assets in equities, with Glasgow City Council’s pensions committee now considering a range of alternative strategies to improve downside risk, produce a more efficient strategy and improve confidence in reaching the funding target.

Trustees to the scheme are considering four alternative strategies, all of which see a dramatic reduction in equities in favour of credit and a range of options including absolute return, high-yield and hedge funds.

The first alternative strategy, which the fund could implement immediately, would see equities fall by ten percentage points to 62.5% with short-term enhanced yield allocations doubling to 15%.

Long-term enhanced yield allocations would increase by 2.5 percentage points, also to 15%, with credit up to 5% from 3%.

Over the next three years, the fund is recommended to shave another 10 percentage points off equity, splitting this evenly between the short and long-term enhanced yield strategies - taking allocations to 20% each.

The two remaining alternative strategies see further reductions in equity holdings following the same pattern.

Strathclyde Pension Fund Asset Allocation

Source: Strathclyde Pension Fund / Glasgow City Council

Strathclyde Pension Fund asset allocation

At the scheme’s meeting in March, the board concluded equity exposure needed to reduce to diversify strategy.

“Implementation should begin at an early date and should be progressed as quickly as opportunities, market conditions and other practicalities allow,” Lynn Brown, the fund’s deputy chief executive and executive director of financial services, told the committee in documents prepared for a recent meeting.

“Processes to facilitate implementation should be considered with a strategy for ongoing risk management thereafter should be developed,” she added.

Both alternative strategies would see the fund dramatically increase exposures to hedge funds, absolute return strategies, real estate debt, direct lending, non-sterling and emerging market bonds, property, social housing, infrastructure debt and equity and farmland.

If accepted, these asset classes could count for 40% of the fund by 2018.

The board also threw support behind Strathclyde’s £100m New Opportunities Portfolio (NOP) suggesting cap restrictions should be raised.

The NOP is Strathcylde’s portfolio focusing small amounts in infrastructure, finance and alternatives.

In December the fund added commitments to social infrastructure, credit for property developers and renewable energy.

The board said it was too early to judge investment performance but the NOP was a success for governance and diversification - suggesting the implementation model used could be mirrored in Strathclyde’s new asset allocation shift.

“The NOP itself could either continue to expand as a separate strand of investment strategy or simply be allocated across the new asset categories,” the fund said.

It was also recommended the 3% allocation cap be lifted to 5% to allow headroom, given it has investment commitments of £300m, with £150m spare capacity.

The fund achieved an 8.8% investment return over 2014, above its 8% benchmark.