Environment Agency Pension Fund, Bristol, England, achieved a 19.6% investment return within its active pension fund for the fiscal year ended March 31, with assets growing 18% to £3.3 billion ($4.1 billion).
The agency has a total £3.5 billion in assets across two pension funds: the active fund and a closed plan.
The active fund's investment strategy returned 2.3% in the year ended March 31, 2016.
The active fund's annual report said the strong returns for the year were helped by the weakness of the pound sterling in the aftermath of the U.K. vote to leave the European Union, "and strong equity market returns boosted by the signs of a broadening global economic recovery and a pro-business U.S. president." It added that the performance underlines the value of the fund's unhedged equity approach and had a currency hedge been in place, the fund would have lost more than £100 million over the year.
The active fund made a 12.1% annualized return over the three years ended March 31, vs. an 8.3% annualized return for the three years ended March 31, 2016.
However, the fund underperformed its benchmark. Executives have been working to reduce equity risk in the portfolio, and had previously warned that "the fund may struggle to perform as well relative to benchmarks in strongly rising markets, although absolute returns would be good," the report said.
The report added, "This is precisely what has happened: Our benchmark return was even higher at 21.2% and the fund underperformed by 1.6 (percentage points) over the year. This was primarily down to the fact that the fund has chosen managers with a deliberate tilt towards low-volatility, high-quality companies, with a view to reducing downside risk and volatility."
However, the report said there is no evidence that a material factor in the relative underperformance was due to the fund's strong tilt toward low-carbon and sustainable equities. "Our best-performing managers were Generation and Impax, arguably our most sustainable," the report said.
Over the year, executives reduced the pension fund's target allocation to U.K. equities to 5%, vs. 7% for the fiscal year ended March 31, 2016. The global equities target remained at 38%, and emerging markets equities was also unchanged at 6%.
The active fund's target to index-linked gilts fell to 8.5% from 9%. Corporate bonds remained at 21% , private equity stayed at 4%, and total-return bonds held at a 5% target. Cash remained at 0.5%.
Target allocations to real assets increased to 10% from 9%, and private debt grew to 2% from 0.5%.
