UK - The London Pensions Fund Authority (LPFA) scheme dropped £551m (€625.9m) in the year to 31 March 2009 to reach £3.02bn, as the global economic downturn caused the asset values of its investment portfolios to plummet.

Figures from the LPFA’s annual report for 2008/09 showed the active sub-fund within the scheme, valued at £1.91bn at the end of March, returned a “disappointing” -21% over the year.

It attributed the result to the “huge drop in asset values in equity, property and commodity markets”, although the LPFA also noted that because Sterling was weak over the period its strategy of hedging 50% of the overseas equity exposure back into sterling “further reduced the return”.

That said, the report noted the global equity portfolio outperformed both its benchmark and the target return of +2% it had been set, while it argued diversification into private equity, infrastructure, global property and target return funds “reduced the under performance as none of these fell as far as equities”.

At the end of March 2009 the asset allocation of the sub-fund comprised 58% in global equities, 15% in diversifying assets, 10% each in private equity and target return funds with the remainder in cash.
 
Meanwhile the report suggested the pensioner sub-fund, valued at £1.12bn, had a mixed year, as the strategy of matching cash flows with fixed income was well-timed for the market extremes, “the bad news is that over the last 12 months the addition of equities was unhelpful and all of our active managers was poor”.

Following a particularly bad performance by the European corporate bond portfolio run by European Credit Management (ECM) over the year - as it had more than 20% invested in bank capital - the LPFA placed ECM under close scrutiny but decided “there is substantial recovery potential in our portfolio so we have remained invested with them”.

The strategic allocation of the pensioner sub-fund at 31 March 2009 comprised just 8% in global equities, 43% in cash flow matching assets, 48% in active bond funds and the remaining 1% in cash.

Vanessa James, investment director at the LPFA, stated in the report: “Our portfolio of diversified assets has performed well in dampening the impact of falls in global stock markets. We have continued to add to this portfolio using the new delegated arrangements, which are bedding in well.”

This is demonstrated by the latest figures for the end of June, which showed the overall value of the fund had recovered to £3.17bn, although the LPFA noted in the annual report that in response to the “huge changes in the macro economic background, a full review of investment strategy will take place in the autumn”.

This follows on from the recent appointment of Aled Jones as the investment manager for Environmental, Social and Governance (ESG) issues in January. And over the next year he will be conducting a review of the LPFA’s ESG activities to ensure they are in line with the financial objectives of the fund. (See earlier IPE article: LPFA to adopt ESG manager screening)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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