The British Coal Staff Superannuation Scheme is unwinding its hedge fund holdings and increasing its property, the latest high-profile fund to drop an asset class beset by fee and transparency concerns.
The £9bn scheme had 4.2 per cent of its assets allocated to “uncorrelated investments”. According to the annual report, this was made up of a £186.4m investment in Bridgewater, a £84.9m investment in DE Shaw and an investment of £105.8m with Brevan Howard, all hedge fund managers.
“The uncorrelated investments are being unwound and the allocation to property is being increased by up to 5 per cent,” the report stated. Coal Pension Trustees Investment, which oversees the scheme’s assets, did not want to comment.
Hedge funds have been under pressure of late as the California Public Employees’ Retirement System last month announced it would divest its $4bn (£2.5bn) hedge fund portfolio and the London Pensions Fund Authority criticised the “2 and 20” fee structure.
However, consultants have said they have not seen a slowdown in hedge fund allocations and that the asset class can be beneficial to some schemes’ portfolios.
John Belgrove, senior partner at consultancy Aon Hewitt, said: “It is not our experience in terms of being an adviser to a broad range of institutional clients… that we are seeing a reduction in appetite for the use of hedge funds in long-term strategies.”
Data from Aon show event-driven and global macro strategies were the most searched for by clients in 2014 to the end of August, with equity long/short funds receiving the least number of searches.
Chris Cheng, principal consultant in investment advisory at KPMG, agreed, saying: “You could argue that, [with what] could happen in the near future in terms of increased volatility [and] monetary policy divergence, it is reasonably ripe for global macro strategies to do well.”
However, there has been pushback by investors on fees. Belgrove said: “There is evidence that fees have come down,” but added they remain high.
He said that since the financial crisis there has also been more willingness from managers to be more transparent on their investment strategies to institutional investors.
Cheng said the premium, well-established managers with a good track record are less likely to reduce fees.
“Whereas if you are a start-up manager, who started up two or three years ago and hasn’t done so well, you might start to think you have to reduce your fees,” he said.
Dumping gilts
The coal scheme has also restructured its fixed income portfolio.
“Developed government bonds and corporate credit were also removed from the scheme’s strategic asset allocation on May 13 2013 and invested in global equities. This is gradually being reinvested into private debt mandates,” the report stated.
Currently, 1 per cent of assets have been invested in private debt, with a target allocation of 7 per cent. The scheme has forward commitments of £6m for private debt, and committed property purchases of £13m, as well as infrastructure and private equity to the tune of £381m.
“Forward commitments in relation to private debt investments of £4m were paid within two months of year-end,” the report stated.
In June, Stefan Dunatov, chief investment officer at CPTI, told delegates at Pensions Expert’s derisking forum that the scheme had sold the gilt exposure due to value concerns.
The scheme uses a scenario-based investment model. It looked at two scenarios: a “return to normalcy” and continued low growth.
“In the normalcy scenario there is no sense in having [gilts] because they will sell off… and actually you will make quite a lot of money out of equities in the first stretch of that until the discount rate implied by the gilt change catches up,” Dunatov said.
