Strathclyde Pension Fund, Glasgow, Scotland, will continue its equity reduction and asset diversification program with new allocations to private debt and infrastructure managers.
A notice on its website following a meeting of the pension fund committee on Feb. 28 said the £21.2 billion ($29.2 billion) pension plan was 105% funded according to its actuarial valuation as of March 31, 2017, up from 94.3% as of March 31, 2014.
The funding improvement was attributed largely to "investment performance significantly exceeding expectations," with investment returns for the three-year period ended that date an annualized 12.5%. The fund returned 12.6% in 2017 and 3.7% in the fourth quarter.
As a result of the 105% funded level, the fund's derisking strategy was triggered. It sold £2 billion out of its passive equities allocation, run by Legal & General Investment Management, using derivatives, said documents related to the meeting. The move, along with other strategic changes since 2014, mean the equity component of the fund's strategic benchmark has been reduced to 57.5% from 72.5%.
The notice said the committee agreed to a further reduction in the equities allocation to 52.5%. Proceeds will be invested in existing multiasset credit, private debt and emerging market debt allocations; and new absolute-return, private debt and infrastructure commitments.
One document said £420 million of the derisking proceeds will be invested in multiasset credit allocations managed by Barings and Oak Hill Capital Partners, to which the pension fund already had a respective 2.1% and 1% asset allocation to as of Dec. 31.
A further £690 million has already been committed to its direct investment portfolio and private debt programs, which have not yet been called by managers. Further information on the commitments was not provided.
Private debt was introduced to the fund's strategy as part of a review in 2014, with Barings and Alcentra running a combined 0.9% allocation as of Dec. 31. "Managers only raise new funds periodically, and in order to absorb the increased allocation a new manager or managers requires to be added. It is proposed that a process be initiated to identify suitable managers. The process may look at real estate debt in addition to the corporate debt, which is the basis of the current allocation," said the document. A target allocation was not disclosed.
The fund will also add £210 million to an emerging market debt allocation managed by Ashmore Group, which already accounts for 1.4% of the portfolio.
The same document said: "It is proposed that an additional absolute-return mandate should be added in order to improve diversification. Detailed terms would be agreed by the investment advisory panel before a selection exercise commenced, and could be further refined as the exercise progressed and before any investment was agreed by the committee." Pacific Investment Management Co. has managed an absolute-return bond allocation since 2009, accounting for 5% of the portfolio as of Dec. 31.
Regarding a new infrastructure allocation, which comes under the fund's long-term enhanced yield allocation, the document said a process should be initiated to "identify infrastructure managers and/or funds to implement a program of overseas or global infrastructure investment." The document said the target allocation is 2.5% of the fund. "The fund already has some experience of infrastructure investment. The direct investment portfolio has agreed 17 separate infrastructure investments with a total commitment value of £600 (million)," said the document.
"Each of the processes proposed above will involve further asset class and market research by the investment advisory panel, officers and the fund's investment consultants, Hymans Robertson, and will lead to initial engagement with potential investment managers," according to the document.
Spokesmen could not be reached for comment and further information.