Dorset ditches hedge funds for infra after strategic review

In March, the scheme agreed a strategic review of its asset allocation with the objective being to “ensure that the fund has the most efficient investment strategy with respect to risk-adjusted return”, according to a strategic asset allocation review document released by the pension fund committee ahead of a meeting this week. 

The scheme is reducing its target equity allocation by 5 percentage points to 50 per cent. It is also planning to ditch altogether its current 6 per cent allocation to hedge funds, looking instead to introduce infrastructure and bolster its use of diversified growth funds. 

Infrastructure investment has become more popular in recent years as schemes seek inflation-linked income, but the illiquidity and cost of infrastructure assets can be off-putting to investors.

The scheme began looking at the asset class earlier this year, tendering with Avon Pension Fund and Swansea City and County Pension Fund through consultancy JLT. It has appointed two managers to target an allocation of 4 per cent with an investment of £80m initially.

The pension committee document stated: "This is a new asset class for Dorset, and the members spent some time understanding the benefits of investing in this area at the training session prior to the March meeting."

The scheme is also doubling the size of its DGF allocation to 10 per cent as well as increasing its inflation hedge to 12 per cent of the overall allocation, an increase of 2 percentage points. 

The diversification imperative

Diversification has been held up as an effective way of reducing risk without negatively impacting returns.

“It’s quite possible to have material impact on a scheme’s risk,” said Mark Nicoll, partner at consultancy LCP. “I’ve seen up to 30 per cent reduction in risk without necessarily affecting returns.”

Nicoll said that diversifying into alternatives could be costly, as a wide range on smaller allocations would each have separate charges.

Infrastructure debt can be an effective way for schemes to reduce risk without revising-down expected returns, as their long-term nature allows them to tap into the illiquidity premium.

Simeon Willis, principal consultant at KPMG, said: “Infrastructure is illiquid and pension schemes are looking at it hard as a way to get returns, but without taking on extra risk.”

However, Willis added schemes should assess their own liquidity requirements before investing to ensure good value. “Our view at the moment is that the illiquidity premium is not particularly appealing,” he said. “The reward is relatively small compared with the amount of inflexibility.”

Infrastructure investment has attracted a lot of interest in recent years, with initiatives such as the Pensions Infrastructure Platform seeking to improve its accessibility for smaller schemes

“Infrastructure has the potential to be very diversifying,” said Nick Spencer, director of alternatives at the consultancy arm of asset manager Russell Investments. “The challenge is around how to access and implement it.”