UK - Lothian Pension Fund is set to increase its allocation to alternative assets from 24% to 35% in a gradual transition to its new investment strategy.

Edinburgh City Council’s pension and trusts committee agreed the revised strategy in March 2009, and although no changes have yet been made the new allocation will see equity investments cut from 66% to 60% and bond assets halved to 5%.

The 11 percentage point increase to alternatives, which could include property, infrastructure, private equity and active currency strategies, will be funded by reductions in UK and overseas equities to 15% and 45% respectively.

In addition the existing 7.8% allocation to UK fixed interest bonds will be reassigned to a slight increase in UK index-linked gilts from 2.2% to 5% with the remainder going towards the alternatives strategy, which currently comprises 12% in property, 2% in cash for currency overlays and the remaining 10% in other assets. (See earlier IPE article: Lothian to revise investment strategy)

Edinburgh claimed the move to alternatives is designed to “improve diversification without significantly affecting return expectations”, but it noted the move to the new strategy will be a “gradual process, that will depend on how the funding level develops, on how market values change and on identifying appropriate alternative investments”.

Meanwhile the pension fund, which reported a return of -8.6% in the first quarter of 2009 and a result of -17% in the year to March 2009, revealed the equity rally in the second quarter had helped offset the earlier poor performance resulting in an 8% increase in the size of the fund from £2.3bn to £2.5bn (€2.83bn) between March and June.

Elsewhere documents published ahead of a pensions and trusts committee meeting held today, revealed the council intends to “strengthen the expertise on the Investment Strategy Panel” following the adoption of the new asset allocation.

It noted the role would be advertised “in due course” with a specific focus on skills related to medium and long-dated asset allocation in an effort to “complement existing skills” on the panel, which acts as an expert investment adviser to the committee and director of finance.

As a result of the new investment strategy the council also conducted a review of it investment decision making processes, the results of which included a request by committee members for more detailed investment briefings outside of normal committee meeting, while the investment strategy panel was recommended to extend its remit to include issues relating to responsible investment.

Other figures from the council also showed the value of the Lothian Pension Buses Fund increased 6% in the second quarter from £160m to £170m, while its transition to a new strategy approved in December 2008 is still ongoing. (See earlier IPE article: Lothian buses may increase alternatives)

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