Devon Pension Fund shifts equity overhang into infrastructure
UK – The £3bn (€3.6bn) Devon County Council Pension Fund has committed to two new infrastructure funds as it moves to double its target allocation to the asset class and reduce a nearly £150m overexposure to equities.
The fund’s £40m commitment to Aviva Investors’ Returns Enhancing and Liability Matching (REaLM) strategy comes as part of the £85m reallocation to infrastructure, one which also includes a $50m (€37.2m) commitment to the First State European Diversified Infrastructure Fund.
According to minutes from the council’s investment and pension fund committee, Devon last year signed off on the £40m investment into two of REaLM’s half dozen sub-funds, split evenly between the infrastructure and ground rents vehicles.
The minutes said the infrastructure investments would complement each other and Devon’s existing stake in the UBS International Infrastructure Fund, accounting for just 1.1% of assets at the end of March 2013.
Explaining its reasons for selecting First State, the pension committee noted the “relatively short [drawdown] period, meaning our cash should be fully invested within a reasonable timeframe”.
While the commitments to Aviva Investors would involve a “staggered” drawdown, the fund said it expected to be fully invested in the infrastructure vehicle within six months, while the ground rents fund would draw all commitments before the end of 2014.
Commenting on the investment with Aviva Investors, assistant county treasurer Mark Gayler noted that inflation was one of the “key risks” facing his fund.
“The Devon Pension Fund’s investment in the Aviva Investors REaLM funds will provide protection against UK inflation, whilst offering diversification at relatively low risk,” he said.
The fund’s most recent annual report, running the 12 months to March 2013, showed Devon invested 59.9% of its £3bn in passive and active equity mandates, close to 5 percentage points above its strategic asset allocation (SAA).
The new infrastructure commitments come as part of an attempt to rebalance the portfolio, but are also an admission by Devon that its previous 2% SAA target was “too low to create a diverse range of infrastructure funds or to have significant impact on the [pension] fund’s risk/return position”, according to a strategy document drafted by county treasurer Mary Davis.
In June, the fund proposed that the increased exposure to infrastructure would be achieved by reducing its bond and cash holdings by 2 percentage points to 16%.
However, on agreeing the investments in late November, the fund said there would likely be insufficient cash available to fund the commitments, and that they were expected to be funded through an equity sell-off “in order to bring the allocation of equities back in line with [the] target”.