UK - The £29bn (€32.9bn) Universities Superannuation Scheme (USS) has awarded a hedge fund-related $1bn (€740m) advisory managed account (MAC) mandate to Man Group.
USS will begin allocating funds to segregated managed accounts in the first half of 2010 and will gain access to Man Group's managed account platform as well as receive advisory services related to due diligence, risk reporting and implementation of manager take-on.
The contract will last for a minimum of three years and USS will maintain responsibility for manager selection and portfolio construction, as the MAC is a fund that can be tailored to meet specific portfolio management requirements.
Mike Powell, head of alternatives at USS said: "We undertook a rigorous selection process for our managed account platform provider. Man impressed us with the depth of their expertise and robustness of their risk management processes."
The asset allocation of the pension fund at the end of the first quarter of 2010 comprised 29.5% in UK equities, 39.5% in overseas equities, 10% in fixed income, 6.5% in property and 11% in alternatives with the remainder in cash.
Alternatives is a growing sector for the pension fund as it is has a target allocation of 20% which will be sourced through a reduction in the listed equity allocation.
The hedge fund, or absolute return, aspect of the alternatives portfolio has taken a while to build up since a new team was hired in September last year. But USS currently has around £400m in direct allocations to hedge funds, compared to a scaled-back £120m in hedge fund replicator funds, and this is from an overall alternatives programme valued at around £3.2bn.
Recent changes to the scheme's investment strategy include a slight increase in fixed income from 10% to 12.5% at a strategic benchmark level. Meanwhile Roger Gray, chief investment officer at USS, highlighted in an interview with IPE that the constituents of the alternatives portfolio will evolve over time.
"Between diversifying assets and pure hedging assets, there are those that provide long-term utility-like income streams that are not necessarily bonds. We don't have a significant allocation to that category at this point, but I'm sure that's one of the aspects of evolution", he said.
The recent appointment of an emerging markets team in February has led to a "transition in the organisation in terms of assets and mandate definitions" after USS decided to split out emerging markets.
The portfolio went live in terms of performance from the end of March, and following the transition the previous regional all country mandates in the overseas part of the portfolio have become regional developed country mandates. The GEM team "picked up the emerging market mantle and assets and has turned that into a global portfolio, giving us somewhat greater exposure to emerging markets but also a more comprehensive one".
Gray confirmed the pension scheme would be making several appointments over the next year which are designed to introduce some "strategic change into the organisation, as well as fortifying parts of it". This includes the building up of risk and quantitative analysis activity, and an increased oversight and risk analysis function.
He said: "We are going to build up our strategy function, which is a responsibility of the CIO, but as one where we have not had a centralised resource focused on it. We've had an asset allocation committee bringing together experience within the organisation. There's a range of activities that we think warrant focused strategy attention, whether it is rebalancing or tactical, medium- or long-term strategy. So we will be looking to bring a couple of people this year into that area."
Gray also highlighted another area of development related to dynamic asset allocation (DAA). He noted that while the USS executive has the capability to adjust the tactical positioning of the fund, "an area of dynamism in the scheme's medium- to longer-term allocation has not yet been fully developed" and added: "We will certainly look to develop the framework so that, when the world changes materially, we can make timely strategic adjustments."
He said the standard strategic asset allocation model, which is usually reviewed at long intervals of every three years, could "fall down under certain circumstances", but noted "the key question is how the pension fund handles these changes and addresses opportunities promptly".
"Some people refer to this as medium-term asset allocation. This is a very important area, not perfectly served by this current model,": said Gray. "While tactical asset allocation is delegated and has the flexibility to respond, it would tend to do so within a narrower ambit. For significant reallocations on the basis of changing medium-term prospects, a degree of dynamism is needed - not necessarily for it to be looked at every day, but so that when there is a strong case for change, you have procedures to look at it and to implement."
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