Year in review: Fixed income portfolios came under strict scrutiny as schemes including the Pension Protection Fund and Cadbury Pension Fund shifted their focus to diversification and higher yields.
Low returns on gilts, the asset traditionally used to match liabilities, forced many schemes further across the credit spectrum into less familiar asset classes.
However, data from the Pension Protection Fund’s Purple Book, released earlier this year, show a steady increase in schemes’ allocations to fixed income since 2006.
The figures show gilts and fixed interest now represent 44.8 per cent of scheme assets, up from 28.3 per cent in 2008.
PPF widens investment scope to reduce risk
The Pension Protection Fund diversified its fixed income portfolio by investing in a broader range of sophisticated assets.
According to its 2013 annual report the pensions lifeboat has 70 per cent of its fund allocated to cash and bonds but has also moved into more alternative assets.
The use of alternative investments has increased to £78m at March 31 2013 from £47.8m at the same time the previous year.
“We’ve made some changes in the portfolio, such as alternative credit, and those are more expensive to run than government bonds, for example, but obviously we’re expecting better rewards out of that,” said Alan Rubenstein, the PPF’s chief executive.
Pearl ups corporate bonds to manage rate risks
Pearl Group Staff Pension Scheme increased its allocation to corporate bonds and reduced investment in growth assets.
In a reversal of its previous strategy to increase gilt holdings, it has bought corporate bonds instead. This is in line with other schemes that have increased their exposure to corporate bonds over gilts, to take advantage of higher yields.
A spokesperson for its sponsoring employer, now called Phoenix Group, said: “The new investment strategy was developed as a way of reducing the scheme’s exposure to investment risk.”
Cadbury shuffles fixed income to improve efficiency
Cadbury Pension Fund increased its allocation to alternative credit to improve the efficiency of the fund’s investment strategy.
The £2.3bn scheme’s most recent annual report showed a 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.
Cambridgeshire diversifies fixed income to up yield
Cambridgeshire Pension Fund invested in European loans to increase yield and protect itself against rising interest rates.
Following a review of its bond portfolio in 2011, Cambridgeshire began to sell its gilt holdings to fund the loans as well as an absolute return bond strategy.
“[The bond restructure was] designed to increase the overall level of yield and provide some protection against a scenario of rising interest rates and falling bond prices,” the fund’s draft 2013 annual report stated.
This strategy shift helped deliver a return of 15.5 per cent for the year, outperforming its benchmark return of 13.6 per cent. The outperformance was attributed to fund's global equity and bond managers who "achieved returns well ahead of their respective benchmarks".
