Nationwide, Strathclyde and British Coal among top five 2014 investment stories

The past 12 months saw continuing low yields, plus a variable environment for growth assets, which kept the life of a chief investment officer challenging.

We have selected five of our best case studies from the year to demonstrate how UK pension funds fit into the wider investment landscape.

South Yorks ups property, EMD and high-yield in search for returns

October 28

The £5.6bn fund planned to increase its allocation to property as well as boosting emerging market and high-yield debt in response to stubbornly low gilt yields.

Schemes had been increasingly seeking to diversify their bond portfolios, as well as looking to more illiquid assets in a search for yield and longer-term growth.

The £5.6bn South Yorks fund decided to place greater emphasis on emerging market and high-yield debt within its bond portfolio.

Its holdings in index-linked bonds were reduced to £580m at March 31 2014 from just over £610m the previous year, according to the most recent annual report and accounts.

John Hattersley, fund director at South Yorkshire, said at the time: “The yields are at historically low levels and we have got to be prudent, and [we] have seen expectations of where yields will go to eventually, so we don’t see any real reason to be committing ourselves to long-dated index-linked bonds.”

British Coal latest to unwind hedge funds, putting trust in property

October 6

This was the year that pension funds fell out of love with hedge funds. The California Public Employees’ Retirement System announced in September that it would divest its $4bn (£2.5bn) hedge fund portfolio.

In October, we reported that the £9bn British Coal Staff Superannuation Scheme had decided to do the same, moving its “uncorrelated investments”, as it called them, into a property strategy.

According to the annual report, this was made up of a £186.4m investment in Bridgewater, a £84.9m investment in DE Shaw and an investment of £105.8m with Brevan Howard, all hedge fund managers.

“The uncorrelated investments are being unwound and the allocation to property is being increased by up to 5 per cent,” the report stated.

Nationwide builds inflation hedge, ups matching assets to derisk

September 29

The £3.6bn bank scheme reduced its exposure to return-seeking assets and put in place inflation hedges as it looked to mitigate the impact of market movements on its liabilities.

Employers in the sector were renewing efforts to control volatility in their schemes after Basel III regulations required scheme deficits to be factored into calculations of their capital base, effective from the end of last year.

The Nationwide scheme put in place inflation swaps – rather than the index-linked gilts it usually uses – with a notional value of £314m to hedge inflation over five, 10 and 15 years.

The scheme also increased its liability-matching assets to 41 per cent at March 31 2014, from 31 per cent the previous year, according to its 2014 annual report and accounts.

Strathclyde taps renewables as alternatives fund swells

June 16

Alternative assets continued their march. The £13.9bn Strathclyde fund removed the limit from its diversified portfolio as it announced investments in a suit of renewable energy projects and those with a positive social impact.Institutional investors were increasingly picking funds that make a positive social impact, from West Midlands Pension Fund’s £40m for small local businesses to Waltham Forest Pension Fund’s £20.8m for healthcare, education and housing projects.

Strathclyde’s investments (see graphic) largely centred on solar, wind and food waste energy, as well as a US healthcare allocation, but all had a target net internal rate of return of more than 10 per cent.

“In this portfolio we do have a preference for investments with a positive impact, but the risk/return fundamentals come first,” said Richard McIndoe, head of pensions at the fund. 

WMPF to give Brum SMEs £40m boost as funds seek social impact

June 9

Local government funds looked to help their communities this year.

The £9.8bn West Midlands Pension Fund decided to set aside £40m for direct lending in order to provide funding to small and medium-sized projects in the Birmingham area.

Direct lending to small and medium-sized businesses grew in popularity among pension funds as regulation made traditional derivative cash flows more expensive, according to market experts, with some funds also attracted by the possibility of a beneficial social impact in their local areas.

The WMPF chose to invest in local businesses through an investment partnership with Finance Birmingham, a public-private partnership aimed at providing capital and investment to businesses in the region.

“We expect the investment to achieve the fund’s target investment return [6.9 per cent a year],” said Antony Ellis, communications officer at the fund.

“In terms of social impact, most immediate and important would be generating and hopefully sustaining employment in the West Midlands.”