The public pension for employees of the Hertfordshire County Council, in the commuter belt north of London, is making its first hedge-fund investments to reduce its weighting in equities and boost returns.
The 2.5 billion-pound ($3.9 billion) fund hired LGT Capital Partners Ltd. to manage 280 million pounds across several alternative asset classes, including placing as much as 70 million pounds in hedge funds, said David Lloyd, chairman of its pensions committee and the investment subcommittee.
Hertfordshire’s move is mainly for diversification, Lloyd said in a telephone interview. About two-thirds of the fund had been allocated to equities, with most of the remainder in fixed income as well as small investments in private-equity and real-estate funds, he said. Public pension plans are looking to diversify their investments to help ensure that they can meet their future obligations to retirees.
“We didn’t feel the portfolio had moved to where it needed to be,” Lloyd said. “We were fairly dominated by equity risk, and we thought a better balance was required.”
Many public pensions, already underfunded, have underperformed their investment targets amid volatile equity markets and low interest rates that crimp returns on bonds.
Fund of Funds
Lloyd said the English county decided to allocate 11 percent of the pension fund’s assets to “a diversified alternative mandate” after a review of its asset allocation by Mercer, a consulting firm, in 2011. The shift to alternatives will be funded by moving money out of equities, Lloyd said.
LGT, a Pfaeffikon, Switzerland-based fund-of-funds manager, will invest the money in hedge funds, private equity, insurance-linked securities and commodities. The Swiss firm will have some discretion over the hedge-fund strategies it chooses for Hertfordshire’s mandate, and the exact investment plan has yet to be finalized.
Hertfordshire’s move makes it “one of the largest mandates focused exclusively on alternative investments ever awarded by a U.K. local authority pension fund,” LGT said in a statement.
The firm manages about 3.9 billion pounds in such multi-alternatives portfolios, said Thomas Weber, a managing partner at LGT. He said the majority of those assets come from pensions across Europe.
“Over the last few years, we’ve seen an increased demand for such combined offerings,” Weber said by phone. “There is an interest, especially among smaller- to medium-sized pensions, that don’t have the resources themselves and want this kind of one-stop shop.”
LGT Capital Partners manages about $6 billion in hedge fund investments within its $25 billion of total assets, according to its website.