The London Borough of Lambeth Pension Fund has invested around £75m into multi-asset credit from its corporate bonds allocation. It is also weighing up investment in private debt alongside other Local Government Pension Schemes.
Andrien Meyers, head of treasury and pensions at the London Borough of Lambeth Pension Fund, confirmed that the London Collective Investment Vehicle’s CQS fund has been selected for its MAC exposure.
The scheme has also set aside £75m for private debt investment, according to Meyers. This has also come from its corporate bond allocation.
Where the market has had low interest rates and falling bond yields, MAC can be seen to complement a traditional fixed income allocation
Amy Richardson, Camradata
“The fund is in collaboration with four other London funds” to appoint one or a handful of managers, he said, adding that “a final decision is yet to be made”.
MAC has seen a boom in interest from public and private sector pensions recently.
Last month, Pensions Expert reported that the Enfield Pension Fund had agreed to move £50m into MAC from equities.
The Reuters Pension Fund, meanwhile, has been invested in MAC since 2015. It added a second mandate last year.
Market conditions favour MAC
Sixteen per cent of European pension schemes are invested in MAC, according to Mercer. They hold an average exposure to the asset class of 8 per cent.
The Lambeth pension committee considered recommendations from its advisers on MAC and private debt in July. Meyers confirmed that the money has now been transferred into the CQS fund.
Data and research company Camradata has seen a 10 per cent rise in searches on its platform for MAC over the past year from its investor based, according to director Amy Richardson.
“Where the market has had low interest rates and falling bond yields, MAC can be seen to complement a traditional fixed income allocation,” she said.
“That’s really because they’ve got access to all areas of the fixed income spectrum – government, corporate, financials, high yield, bank loans, [and] asset backed securities,” she added.
Some commentators have observed a rise in market volatility and the prospect of an economic downturn over the next few years.
Fraser Lundie, co-head of credit and senior credit portfolio manager at Hermes Investment Management, said that against this backdrop, schemes are looking to reduce their equity risk without harming their returns.
“[MAC] provides pension funds with flexibility across credit segments, geography and ratings bands, enabling a more tactical response to changing market conditions,” he said.
Private debt demands decades-long mindset
The proportion of schemes across Europe allocating capital towards private debt increased to 11 per cent from 7 per cent in the 12 months to June 2018, according to Mercer.
The Lambeth fund holds a 5-7.5 per cent target benchmark for private debt, according Meyers.
Dinesh Visavadia, director at Independent Trustee Services, heralded the asset class for the high level of returns it can provide.
He advised that schemes interested in private debt should look to remain within the asset class for “10 years or so”.
“There tends to be a two-year drawdown before the capital is committed,” he added. “That can be a drag because the pension scheme has to hold money somewhere else, in the meantime, and the money doesn’t start earning as quickly as possible.”
He said: “The capital calls come regularly. You get distributions coming through regularly as well, so the money goes in and out like a bank account.”
Lambeth looks to the long term
Lambeth is no stranger to investments that require a longer-term commitment. In December 2017, the committee approved a £42m investment into the Invesco Real Estate UK build-to-rent strategy.
According to pension committee minutes, Lambeth “was 3-4 per cent overweight in global equities, which… would be moved into housing following the committee’s approval”.
Meyers disclosed that this capital has yet to be transferred to the UK private rental sector mandate, adding that schemes can normally expect to wait between 15 and 18 months for this money to be called by a fund for this type of investment.
Enfield cuts equities for MAC following review
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 fund also has “European commercial property within its portfolio for balance”, the minutes read.
Scott Edmunds, senior investment consultant at Quantum Advisory, said the current imbalance between supply and demand within the UK housing market offered an attractive investment proposition for schemes.
"An investment in a UK build-to-rent property portfolio offers pension schemes the opportunity to benefit from a long-term sustainable yield," he said.
