London-based Schroder Investment Management has called on UK pension fund trustees to take a closer look at alternative asset classes in 2004.
Diane Knowles, Director, Strategic Solutions, Schroders plc, said: "For pension fund trustees we would suggest that a New Year's resolution should be to consider using a wider range of asset classes or investment techniques. We expect pension schemes to focus on diversifying the sources of return, while at the same time extracting greater returns from different assets via tools such as specialist management and techniques involving derivatives."
Following three years of negative equity returns to the end of 2002, many UK pension schemes moved into significant deficit. Some trustees thus wished to seek to improve the security of their funds. But moving significantly into bonds was unattractive as the deficit would need to be made up by other means, generally higher contributions and/or cash injections by the sponsoring company. So the catalyst for change for many funds has been the stark realisation that they must consider improving their investment strategy.
Attitudes are changing - not because equities have recovered since the beginning of the year but because the debate regarding long-term investment strategy has moved on, eclipsing that concerning scheme structure (e.g. core/satellite, active/passive). Trustees have questioned both the amount of equity exposure within their benchmarks and whether setting a fixed benchmark between equities and bonds is the best approach for strategy.
Schroders stated: "This debate has led to a greater acceptance of alternative asset classes such as private equity or hedge funds to help diversify risk within the portfolio. The diversification into a wider range of asset classes and sub categories, such as high yield debt, is a trend we expect to continue in 2004."
"Alternative investments undoubtedly have an important role to play in risk reduction and providing a degree of protection from market falls. Alternative investment techniques, potentially involving derivatives, are also generating increasing interest to more accurately meet a scheme's risk and return objectives. We also expect further development of explicit splitting of "alpha" from "beta", whereby a fund manager's skill in adding value in one asset class is transported onto a benchmark return of a different asset. In this manner returns can enhanced whilst maintaining the long term overall strategy suitable for the scheme."
copyright hedgeweek 2004