The Enfield Pension Fund’s policy and investment committee has agreed to move £50m into multi-asset credit from equities, following a comprehensive review of its fixed income portfolio with its investment adviser.
The £1.1bn Local Government Pension Scheme fund is also reviewing prospective managers for a new global credit allocation.
The fund awaits the formation of the London Collective Investment Vehicle before committing to further investment opportunities. It has discussed private debt investment with its adviser.
We will look at what the London CIV has to offer
Paul Reddaway, Enfield Pension Fund
Sixteen per cent of European pension funds have exposure to MAC, according to Mercer. The average allocation to the asset class stands at 8 per cent.
The Enfield fund has decided not to invest in UK investment grade credit on Aon’s advice. The adviser’s negative view is based on insufficient credit spreads that are unlikely to compensate for a rise in credit risk.
Beyond fixed income, Paul Reddaway, head of finance at Enfield Council, confirmed that the fund decided in April to allocate £50m towards a fund managed by specialist real estate manager CBRE.
The fund has also terminated its £170m global equities mandate with Trilogy Global Advisors. It has moved this capital into mandates run by Janus Henderson, Longview Partners and Baillie Gifford within the London CIV.
MAC offers return
MAC strategies are comprised of numerous investments, according to a Mercer paper. These often include a mix of high-yield bonds, bank loans and securitised credit. Distressed debt, emerging market debt and convertibles also feature.
The fund joins a number of LGPS funds that have invested in MAC. Strathclyde committed £420m to the asset class at the end of last year.
The Northern Ireland Local Government Officers’ Superannuation Committee and Haringey funds have also invested in MAC. The London Borough of Haringey Pension Fund's allocation is managed by CQS.
The Enfield Pension Fund’s allocation will be made towards a “long-only [MAC] mandate”, according to April investment committee minutes.
At the same meeting, “the committee agreed to leave the index-linked gilt allocation, corporate bond allocation and absolute return bond allocation unchanged for the time being”.
Amanda Burdge, principal investment consultant at Quantum Advisory, said MAC can attract clients “seeking a ‘gilts-plus’ return”.
“For smaller schemes it also offers the opportunity to access more esoteric bonds in an efficient and cost effective manner. The manager has the ability to adjust the duration of the fund to offer protection in a rising rate environment and to seek opportunities globally,” she added.
MAC can prove particularly attractive for well-funded schemes looking for small out-performance over gilts without adding too much risk to their growth portfolios, according to Burdge. These include schemes targeting self-sufficiency or buy-out.
“The clear risk for a pension scheme seeking a ‘gilts-plus’ return is that the bonds do not keep pace with gilts, and by implication liabilities. In recent years this has certainly been the case,” Burdge said.
Diversify with global credit
Work has been carried out over the summer on identifying potential global credit managers. In April, the investment committee asked Aon to produce a paper comparing asset manager CQS and one of the fund’s ‘buy-rated’ managers.
Enfield’s head of finance confirmed that the fund is currently reviewing managers and will report its findings at its October meeting.
Simon Cohen, chief investment officer at Dalriada Trustees, said that global credit offered an excellent source of diversification for all pension schemes.
“I don’t think it’s particularly size or funding level-dependent,” he said. “Investment in global credit is looking for diversification, looking for exposure to overseas, looking for exposure to overseas credit. I think it’s relevant for everybody,” he added.
Cohen said his clients have invested in global credit with asset managers including Legal & General Investment Management and Muzinich & Co.
Enfield expects a global credit allocation to reduce the fixed income portfolio’s expected volatility by 2.5 per cent a year while increasing expected returns by 1.5 per cent a year.
According to Phil Organ, associate director at Leodis Wealth, low interest rates in recent years have led to “excessive investment in non-traditional assets in the search for yield”.
He said: “Many such investments in the multi-asset arena are now trading at too high a level which may be exposed by rising interest rates.”
Organ added: “Global credit can be an attractive diversified source of income, but carries currency risk.”
The fund elected not to pursue a more aggressive global credit strategy, which was predicted to lower expected volatility by a further 0.2 per cent a year and increase annual expected returns by another 0.6 per cent.
UK investment grade credit is unattractive
The global credit plan, discussed under the moniker ‘introduce global’, is one of a series of investment propositions that has been debated by the fund.
The fund rejected Aon’s ‘keep it simple’ option, which would have entailed an increased allocation to UK investment grade credit. The fund currently holds £80m in corporate bonds through Western Asset Management.
The decision was based on “Aon’s current negative view of UK investment grade credit”, according to the investment committee minutes.
The adviser has identified that “credit spreads are below 100 basis points versus gilts and do not compensate fairly for the increased credit risk and liquidity issues likely to arise in a downturn”.
Christian Wall, director of local government at public sector advisers PFM, disagreed with Aon’s outlook.
“If you’re buying long-term fixed income assets, and you’re basing your views on relatively short-term macroeconomic factors… they have to take a longer-term view, and I’m not sure that’s a longer-term view,” he said.
Wall pointed to heightening global macroeconomic risk, and the gentle rise of UK interest rates that has taken place over the past two years.
The Bank of England base rate was lifted to 0.75 per cent from 0.5 per cent on August 2. It was previously raised from 0.25 per cent on November 2 2017, where it sat for more than a year.
“If there is a tick up, I would actually expect greater investment into UK fixed income, because you start to get some yield back,” Wall said. Chasing yield overseas “for yield’s sake” would lead to greater risk, he argued.
“Diversifying’s fine, but I want to be much more certain about where I’m investing in investment grade credit, so I’d probably take a more concerted view than the adviser has,” he added.
The committee heard that investing in private debt would significantly reduce its fixed income portfolio’s volatility while increasing returns.
In fact, investing in global credit and private debt would provide “the best risk-adjusted returns of all the portfolios modelled”, it was told.
The fund is happy to wait on further investment activity for now, according to Reddaway, who said that in the autumn, “we will look at what the London CIV has to offer”.
Pooling will offer more esoteric opportunities
The minutes add that the modelling carried out by Aon did not factor in all of the criteria that the fund’s investment committee would examine as part of the fixed income review.
“The committee considered the qualitative aspects of the bond portfolio including the governance requirements, London CIV pipeline of assets, number of strategies and fees,” according to the minutes.
Reddaway attributed the fund’s investment in real estate to its 97 per cent funding level and the liability-matching qualities of the asset class. “The aim is to provide long-term inflation protection at a more attractive price to index-linked gilts, partly through the generation of the illiquidity premium,” he said.
The fund is currently transitioning its assets into the London CIV alongside 32 other investors.
The pool’s asset allocation strategy is presently comprised of investment in UK equities, global equities, emerging market equities, multi-asset and fixed income.
Janus Henderson operates the fund’s exposure to emerging markets equities within the CIV, while Longview Partners and Baillie Gifford manage global equities on the scheme’s behalf.
Chris Hulatt, co-founder of asset manager Octopus Investments, said that scheme consolidation offered access to more unconventional investments, such as venture capital.
LPFA looks to build on latest property allocation
The London Pensions Fund Authority will cut the ribbon next year on the Pontoon Dock, a residential property project incorporating 154 high-quality privately rented homes and 82 affordable homes available for rental or shared ownership.
“I think the pooled funds may be able to look again at sectors which many UK pension funds have overlooked in recent years,” he said.
According to Hulatt, schemes interested in venture capital have historically had to rely on US pooled funds for access.
“There are opportunities domestically in areas like venture capital which I think the pooled funds will have the scale and the skill sets to look properly at again,” he said.
