UK - The Pension Protection Fund (PPF) is diversifying its investment strategy by halving its equity allocation in favour of a 20% strategic allocation to alternatives, such as private equity and infrastructure.

At the same time, it will eventually place a greater emphasis on responsible investment and adopt the policy already applied to UK equities across its entire portfolio.

In its new Statement of Investment Principles (SIP), released today, the PPF said the updated strategy will remain low risk and maintain a 70% strategic allocation to cash and bonds, but will in future target an incremental return through investment in a broader range of assets and without increasing the level of risk.

The PPF had an asset allocation of 70% cash and bonds, 20% in equities and 10% in alternatives, including property, and a Global Tactical Asset Allocation (GTAA) strategy.

Under the new strategy, it will take a "more global approach generally" to investment while reducing its allocation to listed equities to just 10%. The remainder will be invested in alternatives including property, private equity, infrastructure and absolute return strategies.

Ian McKinlay, chief investment officer at the PPF, said: "We're moving away from listed equities and more into alternatives. The reason for this is to get the diversification benefits using the scale of the scheme. If you're a large fund it gives you pricing power and gives us access. We're looking to evolve our investment strategy to take advantage of that access."

He said the new strategy of "recycling equities into alternatives" - essentially reversing the previous allocation to 20% alternatives and 10% equity - will help the PPF to diversify risk and increase the return potential while maintaining its "low risk philosophy".

"The attraction of infrastructure is it produces a flow of returns that is relatively stable. We are looking for stability and it is really a defensive investment. With absolute returns, again what we'll be seeking are funds that offer a return that we expect to be closely linked to the LIBOR benchmark. Again it is defensive, so weakly correlated to things like the equity market. The key characteristic is that it diversifies us away from equity market risk," added McKinlay.

The PPF has potential managers lined up to manage the private equity investments, although contractual arrangement are still waiting to be finalised. However, McKinlay said any allocations to this and the other alternatives "is going to have to be built up over time".

"What we will not do is we will not force the pace of investment. We need to be careful that the investments are attractive, carry the characteristics that we are looking for - which is defensive characteristics - and the prospective return. If we don't see those, we won't make the investment. We're going to be careful about the implementation side of it. We just want t o take care and want to do it right," he added.

The PPF, which has an investment portfolio valued at around £4bn (€4.38bn), confirmed it is retaining its existing hedging strategy comprising a portfolio of interest rate and inflation derivatives but added that it has increased the target for outperforming its benchmarks from 1.4% to 1.8%.

Alan Rubenstein, chief executive of the PPF, said: " A higher long-term performance is clearly in the best interests of those people who receive our compensation and of our levy payers."

The SIP also revealed the PPF will place an increased focus on responsible investment and environmental, social and governance (ESG) issues within the investment portfolio. The PPF is already a signatory to the UN Principles of Responsible Investment (UN PRI), however, it currently only applies its RI philosophy to its UK equity investments, through voting rights and engagement by fund managers.

The PPF confirmed it intends to extend these principles to its global equities portfolio "soon" and will then integrate the consideration of ESG issues across all asset classes, including any new asset classes in which it will invest. "In terms of philosophy, nothing has changed, but in terms of implementation it's a fairly big shift," said McKinlay.

The SIP noted that, where appropriate, the PPF expects fund managers to integrate ESG factors into investment analysis and decision-making. It added: "Appropriate weight" would be given to ESG factors when appointing new managers and warned it will hold managers "to account in this regard as part of its regular monitoring process".

McKinlay added: "We're in a process of evolution. That means anything we do, we'll look to engage with our fund managers so that they're adopting our policies. We never stand still."

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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