Lothian Pension Fund has reported a 21.7% return for the year to March 31, 2017, boosted by sterling weakness and strong equity markets.
Lothian chief investment officer, Bruce Miller, said that the fund, like many other UK investors, saw very high global equity returns in 2016, with the MSCI world equity index up 32.2%. The fund has a 66% equity allocation and its equity investment strategy is to take a defensive approach, focused on fundamental risk, so it would not expect to perform as strongly in a rising market.
Miller said that the fund’s equity investments, which are internally managed with two external managers, produced a 25.8% return over the year. “While strong in absolute terms, this lagged the fund’s equity benchmark return by 6.4%. This should come as little surprise, given the deliberately low-risk nature of the equity exposure. The fund would expect to garner some (though not all) of the upside in rising markets, but importantly to have downside protection in the event of significant market weakness.”
As an example of downside protection in the fund’s equity strategy, Miller pointed to results for 2015-16, when the fund’s equity portfolio produced a return of 4.9%, compared to the benchmark of -1.9%. In addition, the fund’s longer term returns are ahead of its benchmark, as its annualised three-year return is 14.8%, compared to 12.7% for the benchmark, and the five-year return is 12.9% compared to 11.4% for the benchmark.
Lothian has a 27% allocation to alternative assets, such as real estate, timber, private debt and infrastructure. Over 10% of the fund’s total assets are allocated to infrastructure and Miller commented: “The fund has been invested in infrastructure for over a decade. Returns were in the high double digits over the year and short and long-term returns have exceeded the objective for infrastructure returns.” Miller added that the fund benefited from a wealth of experience and significant internal resources for infrastructure investing: “That means that we have had access to infrastructure opportunities and the time and expertise to appraise them. I would agree that as an investor, you need to be a certain size to invest in some infrastructure assets, so there are barriers for smaller infrastructure investors. I would imagine that asset pooling will help smaller LGPS funds overcome these barriers.”