Star Group invests third of assets in diversified beta to reduce risk

The £213m defined benefit scheme has invested 32.7 per cent of its investment portfolio in the Blackrock Market Advantage Strategy Fund, according to its latest funding statement.

The scheme did not have any exposure to the MASF in 2010 but by 2012 it had just under a third of its assets invested in the fund.

Claverley Group – the Midlands newspaper company, which is the sponsoring employer of the Star Group scheme – employs BlackRock as a fiduciary manager for the scheme.

Pete Drewienkiewicz, head of manager research at Redington, said a full third of a scheme’s assets in one fund was “probably slightly higher than we would typically implement”.

But added it was not unusual for smaller schemes to have such a high allocation to one fund, particularly if the scheme was using a diversified beta fund to replace equity exposure.

Over the past few years there has been significant growth in pension assets held in diversified beta funds.

This is because of schemes looking for a liquid and cost-effective way to achieve capital growth and diversification.

How Star Group uses diversified beta

In its annual report, the scheme explained how the trustees work with BlackRock.

“The investment strategy is agreed by the trustees after taking appropriate advice,” it said.

“Subject to complying with the agreed strategy, day-to-day management of the scheme’s portfolio, which includes full discretion of stock selection, is the responsibility of the investment manager.”

The scheme’s remaining assets are invested in the following:

• Government bonds – 26.5 per cent;

• Equities – 23.1 per cent;

• Corporate bonds – 11.3 per cent;

• Commercial property – 5.4 per cent; and

• Cash – 1 per cent.

Diversified beta funds are multi-asset vehicles that try to generate returns from a variety of different asset classes, including equities, fixed income, property and commodities.

Managers offering diversified beta use risk parity approaches based on the idea that the most efficient portfolio is one that is more diversified.

This strategy can be more resistant to market losses than a traditional portfolio.

“But the drawback of investing in [all the asset classes] is there is no guarantee of avoiding downside,” said Drewienkiewicz.

Many of these funds invest heavily in fixed income, which has produced favourable returns out of the recent bond market rally. But these assets may be vulnerable if yields do not move higher.

Rita Gemelou, investment strategist at BlackRock, said diversified beta funds offered a much smoother return pattern with a much lower portfolio risk and good capital growth over a market cycle.

She said: “The most important benefit for DB schemes is that they can generate returns while minimising the downside.”

Use of diversified beta in DC

Defined contribution schemes have also shown interest in diversified beta funds.

There is definitely a trend towards increased diversification and the industry is moving in that direction

Mark Fawcett, Nest

Earlier this year, National Employment Savings Trust opted for one of BlackRock’s Aquila Life Market Advantage funds as the bedrock of its default DC offering.

Mark Fawcett, Nest’s chief investment officer, said: “There is definitely a trend towards increased diversification and the industry is moving in that direction.

“Our trustees believe diversification is very important and a diversified beta fund is a key building block to achieve diversification.”

Schemes are also attracted to diversified beta funds as they often have lower charges compared with other types of absolute return funds.

Fund managers are able to bring the cost down because there is no active management in the underlying asset classes.

Fawcett said: “The key is to get a good level of diversification at a good-value price.”