The North East Scotland Pension Fund has taken further steps to diversify its growth portfolio, divesting from underperforming global equities and allocating to a range of private equity houses and diversified growth funds.
The £3.2bn fund’s move mirrors an established long-term trend of pension schemes decreasing equity exposure in favour of both income-generative and derisking assets.
But experts warned that diversifying schemes should pay close attention to factors such as manager skill, given the challenges of the current investment environment.
In today’s world liquidity is quite valuable, with things like central clearing, with the markets being as volatile as they are
Tony Baily, Cardano
As an open local government pension scheme fund, NESPF arguably has a different outlook to the majority of closed, cash flow negative DB funds. It continues to target a benchmark allocation of 70 per cent of its portfolio in equities.
Nonetheless, the latest report and accounts for the NESPF and Aberdeen City Council Transport Fund, also administered by Aberdeen City Council, detail a familiar shift in strategy.
A review carried out earlier this year made a number of changes to take the strategy forward over the next five to 10 years. The report said: “This will include a calculated move over that time period from growth assets to income/protection assets.”
Know your DGF
In the main, the scheme has continued to target growth in its portfolio, funding two DGFs in April this year.
DGFs have come in for criticism recently, with research by Willis Towers Watson highlighting the high costs and disappointing performance of some funds. Tougher overall market conditions mean that less skilled managers are unable to hide behind easy beta returns.
“They were sold as a concept of [delivering] a big proportion of the equity upside and avoiding the equity downside, and some of them did neither of those,” said Alan Collins, director and head of trustee advisory services at Spence & Partners.
Schemes considering allocations to DGFs should be absolutely sure they understand the remit and skill level of that particular manager, according to Collins.
“No two DGFs are necessarily the same just because they are in the DGF space,” he said. When seeking to diversify, trustees would benefit from a “granular” analysis of their requirements, and picking a more specific solution tailored to those needs.
The change is at the expense of a global equity mandate, stopped “due to underperformance”, according to the scheme.
“Generally equities have done well over a number of years,” said Collins, adding that schemes’ experience in the global space may be influenced by the level of currency hedging as well as manager performance.
Potential in private equity
The move away from public equities has also funded a number of allocations to private equity, with the scheme’s holdings in the asset class jumping by £24.9m to £179.9m over the year. Nearly £19m of that was due to a change in the market value of investments.
Carclo deficit highlights pitfalls of equity exposure
Technical plastics manufacturer Carclo is adding liability-driven investment mandates and continued support for diversified growth funds to its defined benefit scheme portfolio, after poor equity market performance saw its deficit almost double.
“Private equity can, for the right size scheme with the right size allocation, be a valuable addition to the portfolio,” said Tony Baily, client director at fiduciary manager Cardano.
While private equity remains, for the most part, the preserve of large pension funds, smaller schemes can access some exposure to alternatives through the use of DGFs.
For Baily, either investment would require a high level of confidence in the fund manager’s skill, especially given the illiquid nature of direct investments into private equity funds.
“You need to be getting a return that’s commensurate with locking your money up,” he said. “In today’s world liquidity is quite valuable, with things like central clearing [and] with the markets being as volatile as they are.”
