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The third annual local authority fixed income survey by Fidelity International reveals that local authorities conti...
The third annual local authority fixed income survey by Fidelity International reveals that local authorities continue to look for diversification from their bond portfolio, rather than to generate return or match liabilities.

The survey reveals that 90% include fixed income assets in their portfolio. Some 48% allocate up to 20% of their total scheme to fixed income and a further 45% invest between 20% and 30%. There is a consistent demand from the councils surveyed to hold sterling denominated gilts and corporate bonds. However, this year's survey has shown a marked increase in the discretion managers are given to move into high yield bonds and emerging market bonds to aid returns.

Active management of fixed income portfolios has risen over the past year, from 62% to 73% with more schemes recognizing the benefits of actively managing credit risk. In terms of manager selection, the survey shows that local authorities are aware of the challenging nature of the UK bond market in recent years. As a consequence, they are looking for managers to convey a clear investment process based on experience, that demonstrates a methodical way of reacting to performance dropping below benchmark.

Mark Miller, head of business development for UK defined benefits at Fidelity International, commented: 'It is clear from the latest survey that the majority of local authorities want few surprises from their bond portfolio, with the belief that a high allocation to equities is the area to spend the risk budget. In a dynamic environment, authorities are looking for explanations of what is happening in portfolios, a clear philosophy, demonstrable risk management processes, a good track record and an increasingly global opportunity set.

'What is also clear is that bond-based, liability-driven investment strategies are not as attractive to local authorities as some managers think. It seems clear that the unique nature of the LGPS and the 'pensions promise' will mean that local authorities will continue to focus on driving returns and achieving diversification rather than de-risking in the future.'

The survey was completed by representatives from 51 local authority pension funds in the first quarter of 2006.

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