Kent cuts passive equities for private equity and infra

The superannuation fund's committee agreed to allocate 3.5 per cent of its fund towards both a HarbourVest private equity fund and a Partners Group infrastructure mandate at a meeting in June, with a formal change to its strategic allocation in September.

These investments are to be “funded initially from passive UK equities”, the minutes read.

Strategies that are less reliant on market direction certainly have a role to play given the prospect of a downturn

Ajeet Manjrekar, River and Mercantile Solutions

It also agreed to invest £70m towards Ruffer’s absolute return mandate as part of a shift in strategic allocation. This is being funded with cash.

The scheme achieved overall returns of 4.7 per cent, just shy of its annual benchmark of 4.8 per cent.

The committee observed that its “long established core managers”, which it lists as Baillie Gifford’s global equities management, Schroders’ UK equities and DTZ's UK commercial property all outperformed their benchmarks. It reserved special praise for Baillie Gifford.

It commented that “both fixed income mandates underperformed their benchmark and returns were low in absolute terms.”

The main sources of equity underperformance, meanwhile, came from Woodford’s Equity Income Fund and Schroders' Global Active Value Fund.

Fund trims equity exposure

With the changes, the Kent fund's target UK equity exposure has dropped by 8.5 percentage points, to 23.5 per cent.

The scheme’s target private equity allocation grew to 4 per cent from 1.5 per cent.

Infrastructure and property will rise 2 percentage points and 1 percentage point respectively, while absolute returns exposure lifted to 8 per cent from 5 per cent.

Nick Vickers, business partner at the KCCSF, said that this autumn the scheme will review opportunities in private debt and multi-asset credit, where it is not currently invested.

“We’ve got a high equity weighting at the moment,” he said. The fund is “taking a little bit of that off the table, but [is] still wanting return,” he added.

Private equity still correlated

For Ajeet Manjrekar, co-head at River and Mercantile Solutions, the act of tweaking asset allocation requires the consideration of both strategic diversification and market conditions. Private equity may not add significantly towards a push to diversity, he said.

“In many respects, when you look at actually what return you get from private equity, it behaves very much like small-cap equity,” he said.

“You’re not getting as much diversification just because you’re tying up your capital [in an asset class] that has a different return profile – the underlying exposure is very similar,” he added.

However, Kent’s decision to allocate to absolute return funds could prove vital in the event of a fall in markets, according to Manjrekar.

“Strategies that are less reliant on market direction certainly have a role to play… given the prospect of a downturn,” he said.

More to come from Woodford

The scheme holds fixed income mandates with Goldman Sachs and Schroders. For the year ending June 30 2018, Goldman Sachs achieved returns of 1.1 per cent against a 3.5 per cent benchmark.

Schroders fared even worse, returning -1.01 per cent versus a 0.56 per cent target.

Schroders’ Global Active Value Fund has also struggled over the same period, adding 5.34 per cent against a benchmark of 8.94 per cent.

But Vickers argued that it has “not underperformed that much”, adding that “value hasn’t done particularly well”.

The Woodford Equity Income Fund, meanwhile, returned -12.83 per cent against a benchmark of 9.02 per cent.

Vickers was bullish about Woodford’s prospects, owing to the positive history enjoyed between his scheme and manager Neil Woodford during his time at Invesco.

Woodford will attend the fund’s November 16 committee meeting.

“We were invested with him at Invesco. In the past the fund has made a great deal of money out of Mr Woodford’s investment expertise and we still expect we will do in the future,” Vickers said.

John Simmonds, principal at CEM Benchmarking, said: “Success in investment management is black and white. You pay an active fund manager to exercise skill to beat a benchmark within an agreed set of parameters.”  

He added: “They either succeed or they fail. It’s not a sentimental or touchy-feely business.”