The £49.5bn (€68bn) Universities Superannuation Scheme (USS) returned 17.9% over the course of its last financial year, with the fund shifting away from Europe’s periphery and allocating to commodities.

The UK’s largest pension fund outperformed its benchmark by 1 percentage point over the 12 months to April 2015, and by 50 basis points over five years with a 10.1% annualised return.

Despite positive performance from its assets, the scheme’s deficit increased to £8.3bn from £2.9bn after falling Gilt yields increased liabilities.

USS’s in-house team, USS Investment Management (USSIM), outperformed its benchmarks and added £500m to the value of the fund.

CIO Roger Gray told IPE contributions to the investment return came from a broad range of assets rather than one star performer.

“As for outperformance, we have had a really good scorecard in terms of breadth, and while benchmarking is difficult for private markets, in 2014-15, it was clearly additive,” he said.

Over the year, the trustees delegated investment decisions to USSIM, which now makes tactical investment decisions based on a reference investment portfolio designed by the trustees.

As a result, the managers moved away from peripheral European bonds over the year to a very small exposure.

“With QE anticipated and then arriving, the attraction of peripheral European bonds compared with German Bunds shrank considerably,” Gray said.

The scheme also began committing to commodity exposure, an asset class not within its strategic allocation, but a move based on in-house views on value.

USS had no exposure to the asset class until the first quarter of this year, using commodity exposure as a cyclical strategy to capture returns.

“Given the weakness seen in commodities,” Gray said, “we added an element of exposure.

“We started nibbling into the commodity space and again in August, as the asset class has been very weak.

“Our current view is that commodities are heavily beaten down, providing potentially attractive cyclical returns and some inflation-hedging qualities.”

Over the year, the scheme also reduced equity and private equity allocations by around 2% as it furthered its de-risking strategy.

It shifted the capital into absolute return and cash.

“With equities, it was an element of de-risking as part of our strategic asset allocation, and this was an incremental step,” Gray said.

Overall, this left the scheme with a 44.5% allocation to equities, approximately one-third of which was allocated to the UK.

USS also had 3.9% in absolute return and 21.4% in private markets – a new grouping of property, infrastructure, private debt, inflation-linked debt and equity, special situations and private equity.

The scheme also recently hedged its inflation exposure further by arranging a direct swap with a UK utility company.

The deal with Yorkshire Water, thought to be worth more than £130m, was arranged when the company’s previous swap deals approached a break clause – where banks and customers often renegotiate the pricing of derivatives.