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Tower Hamlets offers bond portfolio after restructure

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UK - The London Borough of Tower Hamlets is tendering for an active bond manager for its £530m (€589.7m) pension fund, following a restructuring of its bond allocation, while Middlesbrough Borough Council is seeking actuarial advice.

Tower Hamlets has initiated a search for a manager to run a £130m active bond mandate, equivalent to around 21% of the fund's assets, which is currently managed by Aberdeen Asset Management.

A spokesman for the fund said the tender is a review of the Aberdeen mandate, not a replacement process, as the pension scheme has recently restructured its bond allocation and had employed Aberdeen since 2005 when it had acquired the pension fund's existing bond manager Deutsche Asset Management.

The council confirmed the portfolio may be split between managers, and although the mandate will be benchmarked in sterling, Tower Hamlets admitted it would consider both active bond mandates benchmarked against an appropriate sterling bond benchmark, and absolute return bond products benchmarked against sterling cash.

Although the London borough has not yet finalised a performance objective it is expected the performance targets for the successful managers would be between +1-2% gross per year.

The tender notice follows a decision by the council's pension fund committee in October 2008 to partially restructure the scheme's portfolio to take advantage of a longer-term investment view through increased risk.
 
Tower Hamlets first established its existing asset allocation in 2003 by investing around 67% of the assets in equities and split the remainder as 12% in property and 21% in bonds, "in order to provide some stability".

In October, however, members of the committee were advised that the current market conditions provided an "opportunity to reduce exposure to government bonds, which now offer low returns relative to those offered historically, in favour of global equities and corporate bonds which appear to offer higher potential returns in the long-term".

The advisers recommended the 8.5% exposure to index-linked gilts - within the 21% of assets currently managed by Aberdeen Asset Management - "should be liquidated and the proceeds used to increase the allocation to global equities".

It was proposed the pension fund should also reduce its exposure to conventional government bonds by 2%, and instead reinvest this money in corporate bonds, although the advisers warned the timing of the move would "materially influence the potential result", leaving the council with the option of either phasing in the change or to switch at one point in time, both of which "involve risk and require technical advice".

Following these recommendations, the new asset allocation would see the index-linked assets moved to the global equity portfolios managed by GMO and Baillie Gifford, with the latter receiving 71% of the liquidated assets as it previously held the lowest allocation of funds for global equities.

This would result in the overall equity allocation of the fund increasing to 72%, while the bond portfolio would drop to 12.5% of assets and the property and currency allocations would remain unchanged.

Committee members were warned the new allocation of 72% would be higher than the local authority average of 64%, as of 31 March 2008, and admitted "whereas in the current financial environment other schemes may be reducing the risk exposure by reducing equity exposure in favour of fixed interest, this Council is adopting the opposite strategy".

However, the document presented to the council argued: "Recent falls in world stock markets may provide an improved level of prospective returns from this asset class. The additional return offered by corporate bonds is currently at historically high levels and the advisers believe that this additional return is more than sufficient to compensate for the additional risks."

Elsewhere, Middlesbrough Borough Council is seeking an actuarial services provider for the £2bn Teeside pension fund.

The pension fund currently employs Barnett Waddingham for actuarial services, but Middlesbrough is re-tendering the £250,000 contract for an initial period of three years, with the option of a further two-year extension.

The closing date for submissions for the Tower Hamlets bonds mandate is 18 March 2009, with further details available from Hymans Robertson, while additional information on the actuarial services contract should be requested from Middlesbrough Council.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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