The UK’s largest public pension fund is to cut its equity exposure over the next three years as part of a de-risking strategy.

The £19bn (€21.8bn) Strathclyde Pension Fund – which caters for public sector staff in Glasgow and the surrounding area – laid out a new strategic asset allocation at a board meeting last week, which would see it reduce its equity allocation from 62.5% to 52.5% of the portfolio.

The fund would then increase its two “enhanced yield” buckets by five percentage points each.

In a report to the board, CIO Jacqueline Gillies said the move was aimed at increasing diversification – although the pension fund’s own forecasts showed that the new allocations were also expected to reduce volatility and decrease return expectations.

As part of a strategy shift initiated last year, Strathclyde introduced two portfolios: “long-term enhanced yield” – including its real estate and infrastructure investments – and “short-term enhanced yield”, which includes flexible bond mandates and private debt.

The new strategy – known as “Alt 2” – is to be rolled out during the next three years. The fund moved to its current “Alt 1” target allocations during 2016.

Source: Strathclyde Pension Fund
AssetTarget allocation
Equity 62.5% 52.5%
Hedging/insurance 1.5% 1.5%
Credit 6% 6%
S/T enhanced yield 15% 20%
L/T enhanced yield 15% 20%
Expected annual return 6% 5.9%
Expected annual volatility 12% 11%

Under other allocations set out for “future consideration” (“Alt 3” and “Alt 4”), Strathclyde could cut its equity allocation further to as low as 32.5%, a move which would also see its short- and long-term enhanced yield buckets grow to 30% each. Expected annual returns under this strategy were set at 5.5%. Since inception the fund averaged an 11% every year, according to Strathclyde’s own data.

During 2016 the pension fund reported a total investment gain of 20.8%, driven by strong gains from public and private equity fund managers.

Oldfield Partners, which manages concentrated equity portfolios, posted a 42.3% return in 2016. Baillie Gifford (global equity), Genesis (emerging markets equity), Pantheon (private equity), and Partners Group (private equity and real estate) all returned in excess of 25% for the year, Strathclyde reported.

Strathclyde’s board also approved four new investments, worth £90m collectively, in its direct investment portfolio, which targets local and national private equity projects. These include a mid-market lending fund and an environmental infrastructure fund.