UK’s Lothian Pension Fund boosts alternatives

The £2.3 billion ($3.7 billion) Lothian Pension Fund, part of the Scottish Local Government Pension Scheme, has
overhauled its investment strategy, increasing its alternatives weighting to more than one third of the total fund, after poor performance in financial year 2008-09 wiped 17 per cent off the fund’s value.

The fund, which returned -17 per cent in the year ended March 2009, has reduced its equity allocation from 66 to 60
per cent, cut its bond allocation from 10 to 5 per cent, and raised its alternatives allocation from 24 to 35 per cent.

“The increased allocation to alternative investments should improve diversification without significantly effecting
return expectations, the fund said in its Annual Report 2009.

Investments falling into the “alternatives” category include property, infrastructure, private equity and active currency strategies.

The fund said the transition to the new investment strategy would be a “gradual process”, which will be dependent on market performance and on identifying appropriate alternative investments.

The loss in 2008-09 equated to a fall in assets under management from $4.7 billion in financial year 2007-08 to $3.7
billion at 31 March, 2009.

Fixed interest gilts were the best performing asset class for Lothian, returning 10.3 per cent over the year, while UK corporate bonds, hit by the credit crisis and investor concern about the ability of corporates to pay back their debt, returned -13.5 per cent.

Despite the negative overall fund return, Lothian outperformed its benchmark over the year by 9.8 per cent, with the
fund’s investment managers credited for “a significant proportion of the out performance”.

“However some of this relative return is due to the difficulties in valuing liquid assets, such as private equity, at times of extraordinary volatility in financial markets,” the report noted.

“Consequently, it would be no surprise to see relative returns erode in 2009 as private market values catch up with
public market values.”

The investment strategy review was based on the results of the 2008 actuarial valuation carried out by UK consultant Hymans Robertson and included a risk modelling exercise which quantified the risks of various potential investment strategies relative to the fund’s liabilities.

The report concluded that the fund must continue to invest a substantial amount in relatively volatile assets, which have higher longer-term return expectations. The Pensions and Trusts committee approved the review recommendations in March 2009.

Lothian’s actuarial valuation revealed a funding level of 85 per cent at March 31, 2009, the same as the valuation carried out at March 31, 2005.