The Shell Contributory Pension Fund has diversified its growth asset portfolio and reduced its equity holdings in response to concerns about the level of risk.
Last year’s volatile markets and economic uncertainty led to high inflows into alternative assets as European investors sought to diversify away from equities, data from Financial Times service MandateWire showed in February.
We’re seeing a lot of schemes taking steps to reduce risk by reducing holdings or using derivatives
Tim Giles, Aon Hewitt
Speaking during a webcast for members of the SCPF, Clive Hopkins, chair of the scheme’s investment committee, said the main change in investment terms had been the reduction by 10 percentage points in equities.
“We had some unease for some months about the equity market, which seemed to defy gravity. And therefore, after advice and discussion, we took a view in the third quarter of 2015 to sell,” Hopkins said, when explaining the reason for the move.
He added: “We decided it would be wise to make a permanent reduction and within a few days of that decision, which was supported by the board, we sold all of the 10 per cent of equities in a very efficient way. We saved the fund, I think, about £112m by putting the hedge in place.”
He added that some of the money released through disposal of the equities was used to invest in private debt assets.
The scheme introduced a secured lending allocation of 6 per cent and a long-lease property allocation of 2 per cent.
“We will see the fund build up some investments in expert finance loans, in asset-backed securities, infrastructure loans and so on,” Hopkins said.
He added that the scheme would build on the private debt portfolio “slowly and carefully”.
An extra 2 per cent allocation also went into the property, infrastructure and opportunity-driven investment pot.
Flight from equities
Tim Giles, partner at consultancy Aon Hewitt, said there was an “ongoing theme” of schemes reducing their equity holdings to lessen risk.
“We are also seeing a bit more heightened volatility,” he said. “There is this idea of more risk with less return [in equities] so we’re seeing a lot of schemes taking steps to reduce risk by reducing holdings or using derivatives.”
Giles added the upcoming referendum on the UK’s membership of the European Union would only increase pressure on equities.
Challenges of derisking
Roger Mattingly, director at independent trustee company Pan Trustees, said he was also seeing “a desire to seriously look at hedging triggers and volatility in the UK stock market”.
He said, however, that the need for returns priced into many schemes’ recovery plans made derisking a challenge.
“The quest for yield to meet the return needs of the recovery plans is difficult,” he said.
This is compounded by the fact that recovery plan payments are typically made once or twice a year, so schemes risk buying into the market at the wrong time and losing out on returns that might have been generated by more stable contribution schedules, he added.
Gavin Orpin, partner at consultancy LCP, said the scheme’s derivatives overlay had allowed it to protect against equity market falls prior to reducing its allocation.
“They put a hedge in place where equities were higher. They then fell in value but because they had the hedge, they saved the money,” he said.
“If they hadn’t had the hedge in place they would have lost the £112m from general equity market falls.”
Using derivatives when gradually selling out of large equity allocations is not uncommon among large schemes, Orpin said, but he added other schemes looking to reduce their allocation would likely “just sell them”.
