Lothian Pension Fund upped its allocation to lower-risk global equities last year aiming to target a regular income from growing dividends, as schemes battle to find attractive yields at a fair price.
In a low-yielding environment many pension schemes seeking to pay out member benefits as they fall due are reluctant to invest in bonds deemed to be overpriced.
During 2014-15 Lothian Pension Fund moved away from regional to lower-risk global equity underlying strategies, in line with its longer-term derisking strategy.
A 2012 review of the Edinburgh-based fund concluded there was scope to reduce investment risk and approved a longer-term strategy to guide the fund’s allocation to 2017.
Lothian’s overall equity allocation fell 2 percentage points to 68 per cent of total assets over the past year.
The fund’s latest annual report states that: “Approximately three-quarters of the fund’s total equity allocations are managed internally with the majority of these in low cost, low turnover strategies, which are expected to enhance the fund’s risk-adjusted returns over the long term.”
Bruce Miller, investment manager at LPF, said: “The fund invests in stable and high-yielding equities with the ability to maintain and grow their dividends.”
Over 2014 the fund also moved its equity investments away from market-capitalisation benchmarks to focus on capital preservation and growth.
“The fund strategies focus on low-volatility, high-dividend yield and value characteristics,” said Miller. “[These] three... factors are expected to achieve both.”
Investing for income
Nick Ridgway, head of manager research at Buck Consultants, said schemes have been looking to increase their yielding assets by shifting the focus of equity investments towards income generation.
Implicit in higher-yielding equities is more value opportunities, and value stocks, over the long run, have proved to be an attractive and at times defensive investment
David Curtis, GSAM
“There is certainly a trend out there for this kind of thing,” said Ridgway. “A lower-volatility strategy can be a high-yielding strategy; high-yield companies that have stable dividends and are wanting to grow through time tend to be a little less volatile than other stocks out there.”
Ridgway said higher-yielding portfolios allow schemes to harvest the income from higher dividends while providing equity return.
“A less volatile equity portfolio has allowed clients to derisk from their wider equity strategies into something – they still have equity beta on the table but they’re not taking as much risk,” he said.
Value opportunities
David Curtis, head of UK institutional business at Goldman Sachs Asset Management, said high-yielding equities are attractive to pension schemes because dividend income is reasonably constant compared with other equity types.
“Implicit in higher-yielding equities is more value opportunities, and value stocks, over the long run, have proved to be an attractive and at times defensive investment,” he said.
Curtis said a move from market cap-weighted benchmarks would lead schemes towards factor-driven strategies.
“One really important factor is value,” he said. “Value stocks have higher dividends, therefore it’s a higher income-oriented strategy.”
