ITEM PF15 PENSION FUND COMMITTEE – 23 FEBRUARY 2007 ANNUAL REVIEW OF THE PENSION FUND’S STRATEGIC ASSET ALLOCATION Report by the Independent Financial Adviser Background 1. In February 2005 the Pension Fund Committee requested the Independent Financial Adviser to review annually the Pension Fund’s strategic asset allocation which is incorporated within Oxfordshire’s customised benchmark. Subsequently in August 2005 the Committee agreed a new strategic asset allocation recommended by the Independent Financial Adviser, following the annual review by him, to be incorporated within the customised benchmark and the managers’ portfolios were rebalanced to reflect this. The Committee also agreed that the portfolio managed by Alliance Bernstein be moved from their global Diversified Value Platform to their Global Value Platform and that UBS be appointed to manage a Tactical Asset Allocation Fund. 2. Thus, considerable changes were made to the strategic asset allocation last year. The asset allocation up to August 2005 and the revised asset allocation, which is now targeted, together with the actual percentage invested in each asset class, are shown in the Annex (download as .doc file). The principal change adopted then involved a reduction in the fixed interest allocation from 22% to 16%, and within that a lowering of index linked bonds from 10% to 6%. This was matched by a rise in alternative assets from 11% to 17% and within this there were small increases in the allocations to property, private equity and hedge funds. The proportion in equities was held at 67%, but the division within this was amended from UK 40% and overseas 27% to an equal division of 33% and 34% respectively as equity investment now tends to be done on a global sector basis rather than a regional or country basis. This revised asset allocation, with a higher proportion of real assets, albeit with a slightly higher risk profile is more appropriate for the Pension Fund, with its strong covenant, and it provides the opportunity of helping to close the actuarial deficit in the Fund. Moreover, in the short term it has benefited the Fund in that equity, property and private equity markets have been strong since the revised asset allocation was adopted. 3. In the event lifting the actual amount invested in the alternative assets has been a slower process than initially expected. Commercial property was becoming fully valued eighteen months ago and so it has been difficult to find property funds with reasonable medium term prospects, with the result the proportion currently invested in property at 7.5% is still short of the strategic target of 8.0%. Similarly, a huge volume of money has been attracted to private equity. Most of the quoted private equity trusts are now either on slim discounts or premiums and so do not merit the investment of substantial further money, and while two managers of limited partnerships have been appointed, it will take sometime for funds to be drawn down for investment in them. As a result only 4.5% of total assets are currently invested in private equity against a strategic target of 6.0%. Hedge funds are virtually at their target with 2.9% against the benchmark of 3.0%. Further the overall performance of hedge funds needs to be assessed over a longer time frame before more money is committed to the asset class. Thus overall I would not recommend any change to the strategic asset allocation to alternative assets. 4. In the longer term there might be a case for a further small reduction in the strategic asset allocation to bonds, but having reduced the proportion by six percentage points in August 2005, it would probably be wise to continue with the new target of 16% of total assets for a further period, so as to be able to take a measured judgement both in the light of overall market valuations and of the March, 2007 actuarial valuation. In the shorter term bonds are fully valued, but the tactical asset allocation fund managed by UBS will allow for this in its asset allocation decisions. I would therefore not recommend any change in the strategic asset allocation to bonds. As a result, this would mean no change in the proportion of 67% allocated to equities. Further, the division of 33% in UK equities and 34% in overseas equities seems to be about right and should be left unchanged. The strategic allocations between equities and bonds, and within bonds between the different classes of bonds, will be considered again as part of the 2007/08 Review of the Investment Management Arrangements. RECOMMENDATION 5. The Committee is RECOMMENDED that the strategic asset allocation incorporated in the Oxfordshire Pension Fund customised benchmark should remain unchanged for the time being. A F BUSHELL Background Papers: Nil February 2007
|