Centrica Pension Scheme is riding the wider trend towards real assets, in a bid to match liabilities, gain inflation linkage and reduce the need to buy overpriced bonds.
UK pension schemes have increasingly been investing in real assets such as infrastructure and property for both matching and growth potential, but concerns remain about illiquidity and a lack of transparency.
However, data from consultancy Mercer’s most recent European asset allocation survey, published last week, showed a growing proportion of pension funds were allocating to real assets, at 48 per cent for 2015 up from 41 per cent in 2014 (see graph). The average allocation is 8 per cent of schemes’ portfolios.
Speaking at Pensions Expert’s Investing in Alternatives event at the Financial Times last week, Chetan Ghosh, chief investment officer at the Centrica Pension Scheme, said its liability-matching strategy was driven by the performance of each asset class.
“We took the decision as a long-term investor [that] we didn’t want to start buying long-dated gilts,” he said.
“Paying to underperform inflation just seemed absurd to us, so we went about linking the assets that could give us some material, real or inflation linkage.”
Centrica, which owns several energy companies including British Gas, has five closed defined benefit schemes covering nearly 40,000 members, and a total of more than £6bn in assets.
Ghosh said the scheme began its hunt for suitable real assets around five years ago.
“We homed in on trying to get UK inflation linkage as well, looking for assets in the UK,” Ghosh said.
The scheme focused on four main sub-categories: ground rents, commercial property, social housing and infrastructure.
As at December 2014, the scheme had £328m invested in property.
Despite this, Ghosh said the scheme tried to avoid viewing investments purely by their asset class.
“We don’t actually have this bracketing of alternatives and mainstream, we just look for good investments,” he said. “If equities are the right price, we’ll have them. If they’re not, we won’t.”
Also speaking at the event, Bernie McNamara, global head of JPMorgan Asset Management’s real assets programme, said investors faced a challenge in determining their objectives when investing in alternatives.
We don’t actually have this bracketing of alternatives and mainstream, we just look for good investments
Chetan Ghosh, Centrica Pension Scheme
He said: “When we sit down with clients and ask the question of ‘what are you looking for from real assets? Is it diversification? Is it income? Is it total return? Is it lowering your volatility? Is it inflation protection?’... the answer is typically yes.”
Lack of transparency
McNamara added there were two emerging trends among investors in real assets: increasingly diversified allocations within the portfolio and a higher allocation to real assets overall.
However, he said schemes still faced challenges getting access to information on real assets.
“One of the real challenges for building a strategic allocation to real assets… is the lack of good data and the difficulty in putting together a series of modelled portfolios,” he said.
“Investors are used to modelling with a lot of confidence and transparency in the other, more liquid parts of their portfolio, so that is an area where we spend a lot of our time and focus.”
Mark Mansley, chief investment officer at the Environment Agency Pension Fund, said at the event that it was important to take a long-term view of real assets and refrain from judging any part of the allocation a success before it has been in the portfolio for a while.
“We are two years into a 20-year programme, our property assets have done really really well because property has done really really well,” he said.
“That is the trouble, you can look at it and say ‘we’ve done well, we’ve averaged 20 per cent over the last two years… it’s actually [just] that we got off to a fairly good start.”
