UK - Strathclyde Pension Fund intends to initiate a search for an absolute return bond manager as part of a review of its fixed income strategy following underperformance by existing managers.

Latest figures for the end of June 2008 showed the pension fund, run by Glasgow City Council, has seen the estimated funding level drop from 116% in June 2007 to just 85% a year later, which it blamed on a combination of falling asset values resulting from equity and property declines, and a rise in scheme liabilities following increased inflation.

The fund, which was valued at £9.24bn (€11.65bn) at 30 June 2008, reported a second quarter loss on investments of -1.6%, slightly ahead of the benchmark return of -1.8%, however combined with a first quarter loss of -7.1%, the fund has lost £800m in the first half of 2008, from £10.04bn in December 2007.

In particular, the pension fund's investment advisory panel revealed Henderson and Western Asset Management - the fund's bond portfolio managers - have both achieved disappointing results.

Documentation from the investment meeting in May claimed Henderson had disappointed over the 10-year life of its mandate, and despite being allowed to restructure the bond portfolio in 2007 in an effort to improve performance, Strathclyde claimed the "performance has in fact deteriorated since the restructuring".

The investment panel acknowledged many bond managers had struggled in the current credit crisis, but argued "Henderson's underperformance is compounded by a mismatch between the portfolio's investments and its performance benchmark".

In addition, the specialist active bond portfolio managed by Western since 2003 - equivalent in size to Henderson's mandate but with a different benchmark - started well but has underperformed over the last three years, and "starkly underperformed over the last year, primarily due to a wrong call on interest rate moves and a large weighting in financial sector corporate bonds".

As a result, the investment panel discussed a range of options in relation to the underperformance of the two managers, and the overall appropriateness of the current fixed income strategy, and requested Hymans Robertson, its investment adviser, to prepare a discussion paper as part of a pre-tender exercise.

At its most recent meeting, held in August 2008, the panel agreed to initiate a search for a new bond manager with an absolute return approach, with a bespoke pooled vehicle as the preferred structure of the fund.

However, despite recent poor performance - in the second quarter Henderson returned -1.6% and Western achieved -0.4% - both firms will be invited to participate in the tender process, which the panel said would help "inform" the review of the overall fixed income strategy, that will in turn form part of the 2009 investment review.

Meanwhile, the pension fund also confirmed it intends to consider increasing its allocation to private equity, as it has almost met its existing 5% target, but other areas for review include exposure to unconstrained and property.

The investment panel has also warned Aberdeen Property Investors (API) it is on a "close watching brief" and would receive no additional funding until it replaces the fund's current portfolio manager Chris Darroch, who leaves at the end of September.

In addition, the investment panel also agreed to the potential benefit of "investigating an active tactical asset allocation strategy for the fund, which could replace the passive rebalancing model that the fund currently employs".

However, ahead of next year's full investment review, the pension fund panel confirmed it is also keeping Capital International on a "close watching brief" following continued poor performance of its equity portfolio in the UK and US, with a second quarter return of -4.4%.    

In addition, the investment panel agreed to source the strategic asset allocation of 5% in private equity through a reduction in the target value of Capital International's portfolio by 1% to 13.5%, while Baillie Gifford's portfolio is also cut by 1% to a 14% allocation.

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