The Royal County of Berkshire Pension Fund is reevaluating the structure of its absolute return portfolio following the failure to achieve its benchmark target.
The pension scheme has assigned an external manager to review the funds and managers in the absolute return portfolio.
Choosing managers within absolute returns can be more difficult due to the wide range of asset opportunities available to the portfolio.
We didn’t have the resources to find the funds or manager to do that
Pension fund manager Nick Greenwood said the £1.6bn fund is revisiting the structure to try to achieve better returns but will not be changing the value of assets held in the portfolio.
“It was doing okay, but we thought it could do better [and] we didn’t have the resources [internally] to find the funds or manager to do that,” he said.
This is one of the first occasions the fund has used external resources to review the structure of one of its investments, Greenwood added.
The fund has £271m invested in absolute returns, according to its 2013 annual report, and the portfolio was reviewed three years ago.
There are three reasons schemes use these types of portfolios: to diversify from traditional assets, to protect against volatility or to integrate with a liability-driven investment strategy.
To measure the performance of assets within their absolute return, schemes need to put in place targets for managers.
“[Schemes] need to have a benchmark, which could be Libor or could just be cash. If you’re outperforming this you’re doing well,” said Tim Giles, partner at Aon Hewitt.
Most schemes would have different targets set for different assets, he said, and added the higher the target the greater volatility a scheme would be willing to accept.
Strong governance is needed to monitor an absolute return portfolio, said Ciaran Mulligan, global head of manager research at Buck Global Advisors.
“If you’re looking to evaluate around a manager in an absolute return space, understanding what that manager is doing is crucial,” he said.
Red flags for a scheme monitoring managers within their absolute return portfolio, said Giles, could include if they stop following their process, changes in business ownership that could lead to managers leaving or if a manager’s operational systems are not robust enough and could be susceptible to fraud.
