In a bid to improve diversification and returns, the Comet Pension Scheme has added alternatives to its portfolio, as rising deficits and the current economic environment prompt many pension funds to hunt for yield.
An increasing number of schemes have been adopting alternative asset classes in an attempt to generate returns. While some funds have opted for more niche alternative asset classes such as shipping, others have turned to widely known options, including alternative credit.
Investors need to understand their liquidity requirements, carry out thorough due diligence and analyse the relative merits of what are heterogeneous assets
Tim Giles, Aon Hewitt
The defined benefit scheme, sponsored by European electrical retailer Darty, made an “investment into stressed credit and a new discretionary alternatives mandate” in June, according to the fund.
Improving the return profile
As well as stressed credit, the discretionary alternatives mandate – which makes up 12 per cent of the £440.1m scheme’s overall asset allocation – includes exposures to insurance-linked securities and property.
P-Solve Investments was mandated with the new brief, which will target at least 5 per cent above the compounded three-month Libor return.
The trustees “agreed that further diversification of the investment portfolio would help to improve the return profile, while helping to mandate risk”, the scheme explained as the reason for the move.
The first step in funding the new mandate was the introduction of the stressed credit mandate with Phoenix Advisors; further mandates will be added, according to the scheme.
Long-term investors can reap illiquidity rewards
On the subject of stressed or distressed debt, Tim Giles, senior partner at Aon Hewitt, said investment in distressed credit allows viable companies struggling to meet their debt commitments to emerge from insolvency situations.
He said this means the asset class “has a valuable role to play in a recessionary situation when an increasing number of companies are struggling to service debt”.
When it comes to alternative asset classes in general, Giles said: “Many pension schemes continue to make use of their long investment horizon.”
He noted that pension funds are a supplier of long-term capital to the economy, particularly now the regulatory environment for banks has changed.
“Some illiquid opportunities such as private lending and real estate debt financing continue to offer attractive yields,” he said.
However, he cautioned: “Investors need to understand their liquidity requirements, carry out thorough due diligence and analyse the relative merits of what are heterogeneous assets.”
David Curtis, head of UK and Irish institutional business at Goldman Sachs Asset Management, said the most effective approach “in seeking consistent, positive returns is not binary, but... has a broad balance of both traditional and alternative exposures, and then incorporates market views to dynamically adjust the portfolio”.
Credit crunch trauma has made investors cautious
Simon Cohen, head of investment consultancy services at Spence & Partners, said he has not seen a huge trend in stressed credit investments, partly due to the fact investors are wary after the credit crunch.
In terms of the Comet scheme’s discretionary alternatives mandate, Cohen said: “I’ve not seen anything structured this way, because it’s quite specific… in terms of the boundaries and also the types of asset classes that are being invested in.”
But Cohen noted that generally speaking, schemes are moving up the risk ladder. “Pension schemes are hunting for yield and return in a low-return, low-yield environment, so they’re having to take on a bit more risk,” he said.
When investing in alternatives, usually “you’re looking for diversification [and] you’re looking to pick up the illiquidity premium as a long-term investor”.
