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Top funds adjust alternatives allocation

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The active v passive debate has rumbled on for years.

The higher returns attributable to active asset management, naysayers argue, are eroded by the higher fees pension schemes must pay to access them. However, those in favour of active management argue that it delivers returns above the fees it demands.

The government revealed earlier this month in its consultation on the future of the local government pension scheme that it believes in the value of both active and passive asset management.

However, it feels that both strategies are expensive enough to warrant instigating bulk bargaining power.

The Department for Communities & Local Government is consulting on homogenising LGPS investment strategies to a degree, via common investment vehicles.

It has proposed one passive management CIV, and one CIV via which local authority schemes can access actively managed alternative assets.

It believes, based on analysis by Hymans Robertson, that if local authorities moved all their listed assets into passive management “investment fees and turnover costs could be reduced by up to £420m per year”.

It said: “The government believes funds should make greater use of passive management for all listed assets such as bonds and equities.

“Alternative assets such as property, infrastructure or private equity would continue to be managed actively through a separate CIV.”

 How schemes invest now

Currently most schemes allocate about three-quarters of their assets in equities, with smaller allocations to alternatives.  

Equities have always dominated portfolios, but in the 12 months to 31 March 2013, the three funds highlighted below increased their equity holdings and pulled back their allocation to alternatives.

The London Pension Fund Authority’s active sub fund held 74% of its portfolio in equities, compared with 72% the year before.

Similarly, South Yorkshire Pension Fund Authority’s largest portfolio weighting was towards international equities, at 61%, up from 57% in 2012. Tyne & Wear followed suit, holding 60% in equities, up from 57%.

Accordingly, as allocations to equities grew, allocations to alternatives such as infrastructure and private equity fell.

The LFPA’s active sub fund cut its infrastructure holding from 5% to 4%, its commodities holdings from 3% to 2%, and its private equity holdings from 13% to 12%.

In a similar fashion, SYPFA cut its private equity allocation from 5% to 4.8%, while T&W held its infrastructure holdings at 1.6% and cut its private equity holdings from 10% to 9.9%


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