UK - F&C Asset Management is taking a new approach to the delivery of balanced portfolios and diversified growth funds for pension funds by launching an offering designed to be largely passive in nature.

Balanced portfolios offered by UK fund houses are still required to be largely actively-managed and "highly concentrated in asset exposure", suggested Paul Niven, head of asset allocation for the F&C Diversified Growth fund team.

F&C believes it is possible to reduce the risk to beta by following a passive strategy and investing up to 50% of the fund in alternative assets.

Niven suggests until now the only way for a UK defined contribution pension fund investor to invest in diversified balanced portfolios was to buy actively managed funds.

He acknowledges the investment market is becoming more efficient in its delivery of alternative investments and it is now possible to present small to medium-sized pension funds with diversified beta-seeking investments, accompanied by liability-driven investments (LDI) solutions.

As a result, the long-only UCITS III fund has been designed to present a "well-balanced risk budget and equally weighted equity exposure" by passively investing no more than 10% of the portfolio weighting, or up to 16% of risk contribution, in any one of the 12 asset classes - seven equity classes along with commodities, hedge funds, private equity, property and high yield fixed income - and trade in listed certificates where possible to help reduce costs and risk exposure.

This is a significant shift in asset strategy, given access to passive-nature alternative investments is still somewhat limited, expensive and a mature market has yet to be established, according to fund manager Toby Vaughan.

Still, he expects to see the growth of a cheaper and more accessible passive ‘alternatives' market over the next three years.

"We think there is no-one accessing the underlying asset classes passively and it is unproven active management adds value net of fees," he said.

"We are looking to achieve an information ratio of 0.5 to which is significantly lower than we have achieved before and fund level volatility of 7-13% which is significantly lower than equities volatility of 17-20%, depending on market activity," added Vaughan.

More specifically, he recognises there are few opportunities for pension funds to invest in fund of hedge funds, private equity and property through passive means and which do no not subsequently see high correlation risk to equities, suggested Vaughan.

So the fund, to be launched on September 3, has been designed to buy into ETFs and futures where appropriate - except in the case of equities where, F&C believes, the purchase price can seem expensive - as well as invest in investment trusts because there is no recognised private equity index in which to invest.

The firm notes there is currently no single passive vehicle which features in every asset class, so rather than invest in hedge funds replication and similar strategies in other asset classes, F&C will invest in a combination of equities, ETFs, futures, investment trusts, as well as listed certificates at a later date, while deploying active global tactical asset allocation (GTAA) strategies to achieve its target return of cash+4% each year over a five-year cycle.

In order to cut currency risk, all overseas exposure is being hedged, particularly as the fund may look to buy into ETF offerings such as the Spider in the US, or through Nikko or Nomura in Japan where prices are, according to F&C, much lower than European investments.

While no allocation has been made for an infrastructure asset class, at this stage, F&C may widen its range at a later date but for now will hold back as ETF infrastructures, for example, are still highly correlated to equities given they invest in global utilities.

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