Pension Protection Fund, London, has created a hybrid asset allocation strategy, with increased investment in illiquid assets with hedging characteristics, said Barry Kenneth, chief investment officer at the fund.
The strategy features increased allocations to alternative, hybrid and liability-driven investment assets at the expense of equities and government bonds. Examples of hybrid assets are real estate leases, debt infrastructure, corporate index-linked bonds and direct lending, Mr. Kenneth said in an e-mailed comment.
The PPF aims to implement this strategic allocation within the next three years.
The strategic target allocations will change as follows:
- Cash and bonds, 58% from 70%;
- Alternatives, 22.5% from 20%;
- Equities, 7% from 10%; and
- Hybrid assets, new 12.5% allocation.
“There are a number of challenges facing the fund in the next few years associated with using over-the-counter derivatives,” Mr. Kenneth said. “The requirement of central clearing will cause the cost of hedging to increase, and financial regulations are challenging banks' abilities to warehouse risk. Investing in hybrid assets enables the PPF to prepare for these changing market conditions by acquiring assets that provide long-term cash flows and have less reliance on derivatives.”
When asked whether the PPF's new strategy will mean increased searches for managers, Mr. Kenneth said: “We will continue to look at investment and fund manager opportunities that fit within the revised statement of investment principles.”
The changes were part of the PPF's revised statement of investment principles, published Thursday. The £15.6 billion ($26.7 billion) fund also altered its risk budget, adding illiquidity as a separate factor.