The Imperial Tobacco Pension Fund has cut its exposure to shares and corporate bonds in favour of alternative asset classes, with a view to increasing the scheme’s sources of return and reducing reliance on equities.
Alternative asset classes continue to prove popular among pension schemes, in particular real assets, with 48 per cent of plans having an allocation, according to Mercer’s 2016 European Asset Allocation Survey.
As schemes mature and have increasing needs to meet pension benefits out of cash flows, then equities arguably become less suited due to the level of volatility
Matt Tickle, Barnett Waddingham
In a 2017 update to members, Imperial Pensioners Action Call, an independent organisation established to protect the rights of all members of the scheme, said that “the trustees have recently agreed to changes in the long-term investment strategy”.
The trustees “have reduced their holdings in equities and corporate bonds in preference to alternative asset classes”, it said.
Ground lease investment enters portfolio
IMPAC said the scheme has also completed an acquisition of the ground lease on the Bristol Harbour Hotel. It added that “whilst the market was extremely competitive, [the scheme expects] further acquisitions to be made during 2017”.
Matt Tickle, partner at Barnett Waddingham, said that ground leases are “rarely used” because there is a low level of supply in the market.
However, property in general “is an asset class that continues to gain attention, although a large number of schemes will have some exposure already”.
He added that “long-lease funds, with their focus on inflation-linked income streams, continue to get most interest”, but there are also “currently significant queues to get into many funds, again due to a shortage of supply of such assets. Yields on such funds are holding up reasonably well despite the demand”.
Why schemes move away from equities
Tickle said that there are a number of factors leading to pension funds shifting from equities to alternatives.
“As schemes mature and have increasing needs to meet pension benefits out of [investment income and asset sales], then equities arguably become less suited due to the level of volatility and the need to avoid crystallising losses, if [they are] cash flow negative,” he said.
Diversification is also a key driver, he said, while some schemes look to enhance returns where deficits have increased as a result of the level of liability hedging in the scheme.
Source: Mercer European Asset Allocation Survey 2016
There are also concerns regarding the current valuation of equities. “Markets have had a very good run and some are looking highly priced. As a result schemes are looking at taking profits rather than necessarily reducing strategic weights to equities,” said Tickle.
Similarly, Simon Cohen, chief investment officer at Dalriada Trustees, said that in addition to diversification and cash flow reasons, we are “seeing a move from equities to alternatives due to equity valuation concerns”.
Interest in less established alts up
Peter Hobbs, managing director at consultancy bfinance, said the case for alternatives is well-established, but noted that UK funds tended to have slightly less exposure than their Australian, Canadian and Dutch counterparts.
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He said the most mature alternative asset classes are currently real estate and private equity, with infrastructure, private debt and agriculture and timber being smaller but experiencing strongest demand over recent quarters.
Beyond these established alternative asset classes, “there is growing interest in others such as trade credit, life settlements, aviation finance… all of which tend to provide attractive cash flows that have low correlations with public markets”, Hobbs said.
Hobbs said that these asset classes have become more aggressively priced, “certainly in absolute terms, if not relative to bonds and equities”, resulting in challenges for capital deployment.
“Great care needs to be taken in ensuring that the strategies are appropriate for the overall scheme, and in the implementation with significant variations in the quality of managers, their track records, discipline, alignment and fees,” he said.
Implementation issues are particularly significant for illiquid asset classes, where investor capital is often tied up for eight years or more in closed-ended commingled funds, Hobbs added.
