Teesside ups cash awaiting more profitable equity market

Many schemes have increased the amount of cash deposits they hold either to ensure member benefits can be paid out, as part of a hedging strategy or in preparation to invest in other assets. 

“[Our] adviser’s advice during the year was to be a little more cautious when investing in rising equity markets and that they would be happier to see a 10 per cent fall before being more active in the markets,” a spokesperson for the fund said. 

This policy, like all other investment decisions, is under constant review by fund managers and advisers, the spokesperson said, adding: “The fact that markets pushed on further meant that the cash was deployed not into equities or bonds but into term deposits."

The £2.9bn fund held £129m in cash deposits at the end of March, up from £99m the previous year, according to the fund’s 2013 annual report.

“Over recent times, what we have found is that the amount of cash that pension funds hold has increased and there’s a number of reasons for that – as defined benefit schemes have closed, the large cost of providing DB schemes to employees and the amount of cash passing into funds has diminished,” said Ciaran Mulligan, global head of manager research at Buck Global Advisors.

Alternatives to holding cash

Holding a greater level of cash rather than investing in other asset classes can result in lower returns. 

Mulligan said there are other ways for schemes with liquidity problems to ensure they can pay out benefits, other than having a more inefficient sum of cash on their books.

Schemes can have cash flow-matching within their fixed income portfolio, or an annuity buy-in that pays out at the same time as member benefits need to be paid.

Rather than reinvesting dividends produced by their growth portfolio, schemes could use this capital to pay benefits when they are due.

“A lot of schemes are looking now at investment mandates that they have, and rather than automatically reinvesting dividends and coupons they are looking at ways they can get them out of the portfolio at first call,” said Bobby Riddaway, head of investment consulting at Capita Employee Benefits.

However, Jon Exley, a partner in the investment advisory team at KPMG, said it depends on the rationale for holding more cash to judge whether it is a good decision.

“If cash is backing derivatives that are giving you exposure to bonds then it’s a perfectly sensible strategy to do that,” said Exley.

Making stock selection decisions

Teesside achieved a return of 12.8 per cent compared with a benchmark return of 13.8 per cent at March 31 2013.

The fund puts this slightly below average performance down to stock selection decisions, which centred on investments in the banking sector. 

It now holds fewer investments in the banking industry compared with the average fund, as its advisers consider there to be great risks investing in this sector, according to the report.

Exley said that while asset allocation is far more important within traditional markets, when schemes invest in less traditional markets such as high yield bonds, the ability of managers to select and invest in opportunities within those asset classes becomes more important.

“As [schemes] are starting to look at diversification of names [they] have in the portfolio, it becomes important to make sure you don’t have a particular concentration in particular industries or [company] names,” said Exley.