Cadbury Pension Fund has increased its allocation to alternative credit in a restructure of its fixed income portfolio.
Many pension funds have decided to diversify their fixed income portfolios in a bid to increase their returns in a low-yield environment.
Cadbury's asset allocation
Liability hedging: 23.9%
Global corporate bonds: 8%
Global sovereign credit: 6%
Alternative credit: 5.9%
Emerging market debt: 2.5%
Equities: 30.9%
Hedge funds and alternative beta: 9%
Property: 6.9%
Private equity: 6.9%
The £2.3bn scheme’s most recent annual report showed significant restructure of its bond portfolio, with its allocation to fixed income now comprising 46.3 per cent of its portfolio compared with 41 per cent in 2012. Cadbury upped its alternative credit allocation to 5.9 per cent from 1.2 per cent the previous year.
"During the year the trustee board has approved a number of changes aimed at improving the efficiency of the fund's investment strategy by diversifying the growth portfolio," said its annual report.
The scheme also reduced its exposure to emerging market debt and corporate bonds. It now has an 8 per cent allocation to global corporate bonds compared with a 14 per cent allocation to sterling corporate bonds in 2012.
It has also introduced a global sovereign credit allocation, which makes up 6 per cent of its portfolio.
Moving up the yield curve
Investment advisers have reported a greater tendency for pension schemes to explore the risk of different parts of the fixed income markets and have been advocating the use of alternative credit.
"Traditionally, pension funds haven't looked into many credit sectors that were not investment grade and were potentially underinvested," said Alex Koriath, head of manager research at KPMG Investment Advisory.
There are two reasons schemes are considering the asset, he added. First, they put investors higher in the capital structure than equities and more certainty on the cash flows in case there is not an "extraordinary recovery".
The other factor is that pension schemes over the past couple of years have been able to exploit the fact banks are not lending and "earn a bit more return for the risk they are taking", Koriath said.
"This [opportunity] is not going to be there forever," he added. "It might go away in three to five years as banks repair balance sheets."
Pensions Week previously reported the Cambridgeshire Pension Fund diversified expanded its fixed income portfolio to include European loans.
At the time, Tapan Datta, partner at Aon Hewitt said: "It is interesting to see how [UK schemes'] bond portfolios are internationalising... there is a willingness to go further afield."
The £2.3bn Cadbury scheme's annual report also pointed to a worsening of its funding level. It was estimated at 79.1 per cent in 2012 compared with 86.3 per cent in 2011. "The [scheme] has adopted a long-term view of the funding position," the report states. The scheme could not be contacted by the time of publication.
