The UK’s largest public pension fund sold 10% of its equity exposure in December as part of an ongoing risk-reduction exercise.

The £21.2bn (€23.7bn) Strathclyde Pension Fund cut more than £1bn from a passive equity mandate run by Legal & General Investment Management during the month, according to an investment strategy report presented to the fund’s trustees on 28 February.

Strathclyde director Richard McIndoe’s report laid out plans to reduce the scheme’s equity exposure to 52.5% of the portfolio, rebalancing in favour of its short-term and long-term “enhanced yield” allocations. 

December’s activity meant Strathclyde finished 2017 with 57.5% of its portfolio weighted to equities.

The pension fund  – for council workers in and around Glasgow, Scotland – began reducing its stock market exposure last year after an actuarial valuation showed it to be 105% funded as of 31 March 2017. The scheme generated a return of 12.5% a year in the three-year period to this date.

It is moving to a broadly diversified strategy including private debt, emerging market debt, global credit and UK infrastructure, the latter with a focus on renewable energy. 

McIndoe said the fund planned to retain its target allocations for private equity and the direct investment portfolio, meaning the strategies would become a larger part of the overall equity portfolio.

Rebalancing favours credit, EMD, infrastructure

Managers including Barings, Oak Hill, Ashmore and DTZ stood to benefit from the shift, the strategy report said.

Barings and Oak Hill were to receive £420m between them, the report said, for additional investments into existing multi-asset credit strategies. Ashmore stood to receive £210m to invest in emerging market debt. These allocations are part of Strathclyde’s “short-term enhanced yield” silo.

In the “long-term enhanced yield” silo – designed to provide inflation protection as well as income – the scheme planned to invest 2.5% of the portfolio with global infrastructure managers.

“In the first instance this should look at open-ended pooled funds as these can achieve fairly rapid deployment of capital, good visibility of existing assets and a stable long-term allocation with the option of some liquidity,” the report said.

“Consideration should then be given to closed-ended funds which could provide a long-term yield, and a more specific focus on individual market segments in addition to core holdings.”

The current allocation shift is scheduled to be implemented by 2020. Under Strathclyde’s longer-term plan, yet to be formally agreed, it could shift its equity allocation down further to 42.5% and then 32.5%.