The Avon Pension Fund, with assets valued at £4.6 billion, has reviewed its investment strategy, in order to reduce its equities allocation from 50% to 40% of total fund assets, with a long-term view of further reducing its exposure to 37.5%.
This reduction was driven by the scheme’s improved funding level due to strong asset returns, said David Veal, chair of the scheme’s committee, in its latest annual report. The cut in the allocation to higher volatility growth assets introduces more stability to the contribution payments made by employers. However, even after this reduction, equities continue to be the main source of risk within the portfolio – contributing 54% to total risk.
Another main change to the fund’s investment strategy has been the reduction in corporate bonds from 8% to 2%. With yields on bonds at low levels, the return prospects for this asset class were deemed to be unsustainably low, with any increase in interest rates posing a threat to the capital return received on bonds.
Instead, a new allocation to multi-asset credit has been made to capture returns from credit securities that are less sensitive to interest rates and will better protect capital during a period of rising interest rates. Initially, the allocation is 11%, reducing to 6% in the medium term. There has also been an increase in the allocation to diversified growth funds of 5% to 15%. These funds target equity-like returns but with less volatility as they invest across a diversified range of assets.
Within the fund’s passive equity portfolio, there has been a switch from its global equity portfolio into a low carbon global equity fund. This resulted from a review of the scheme’s Responsible Investing Policy in 2016. A portfolio tracking the Low Carbon Index is expected to reduce annual carbon emissions by approximately two thirds compared to a portfolio tracking a traditional passive global index, Veal explained.
Furthermore, in addition to de-risking Avon’s equity portfolio by physically reducing the allocation to equities by 10%, the fund implemented an equity protection strategy designed to compensate the fund in the event of a sharp draw-down in equity market prices. Veal said this strategy was designed to give a greater level of certainty of asset returns over the next triennial valuation and protect the improvement in the funding position since the 2016 valuation.
Avon’s assets are pooled into Brunel Pension Partnership.