The Pension Protection Fund (PPF) has published its revised statement of investment principles (SIP) which will see the fund increase its allocation to illiquid assets over the next three years.
The lifeboat fund has introduced a “hybrid” asset strategy to its strategic asset allocation comprising illiquid assets, which it said have inflation and/or interest rate hedging characteristics and are intended to be held to maturity, for example sterling index-linked corporate bonds, private placements of bonds and structured notes.
Over the next three years the PPF is targeting a 12.5% allocation to this hybrid bucket to hedge inflation and interest rate risk while reducing its strategic allocation to cash and bonds from 70% to 58%.
PPF chief investment officer (CIO) Barry Kenneth (pictured) told portfolio institutional the move was driven by forthcoming regulation and the rising cost of holding derivatives.
He explained: “There is regulatory change which means pension funds will have to clear swaps and we are a big user of inflation and interest rate swaps which is going to add a cost to our business. And as Volcker and Basel III rules kick in, banks will take less proprietary trading risk and the amount of capital they can appropriate to businesses will be impacted so that could affect the way some banks provide liquidity for swaps.
“We are going to grow over the next five to 10 years so we are potentially going to become bigger than these markets at the exact time the liquidity provision for these markets is going to fall – so that did not feel like a great place to be.”
The PPF recently undertook a long-term lease deal with M&G Real Estate involving the purchase of two office buildings in Manchester leased to RBS for 23 years with rental uplifts of 3%.
Kenneth said: “The underlying cashflows in the transaction were somewhere between 75-80% of the economics of the deal so it was the stable cashflows of that deal we were looking at, not the fact it was a property investment for capital appreciation.”
He also said co-bidding with an annuity company, such as Prudential/M&G, which had years of experience in investing in these types of assets offered an advantage.
“The managers that are going to predominantly look after that bucket for us are likely to have some form of tie up with annuity companies for mandates in which we extract their expertise,” he said.
The PPF also currently has a tender out for a direct lending mandate which, Kenneth said, was expected to be funded in the next couple of months.
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