By Ilonka Oudenampsen
The Environment Agency Active Pension Fund will reduce its investment in equities and increase its corporate bond investment, as it aims to be 100 per cent funded on an ongoing basis by 2031, its investment strategy and asset allocation for 2012-14 revealed.
The new strategy is designed to improve the fund’s risk-adjusted returns, enhance diversification, make as effective use as possible of its assets, provide flexibility to meet the challenges of difficult economic conditions, and strengthen its commitment as a long-term responsible investor, the fund said.
In order to achieve its objectives, the fund will reduce its public equities from 63 per cent to 50 per cent of its portfolio, although within this allocation it will increase actively managed emerging equities from 4.5 per cent to 10 per cent. Furthermore, it will reduce index-linked gilts from 13.5 per cent to 5 per cent, maintain its private equity investment at 5 percent and increase corporate bond investments from 13.5 per cent to 28 per cent.
As the fund hopes to maintain and develop its reputation as a environmentally responsible investor, it will increase its alternative ‘real asset’ investments from 5 per cent to 12 per cent, with 5 per cent in sustainable property and 3.5 per cent each in infrastructure and farmland/forestry.
This change in asset allocation will also help the Active Fund to move towards its target that by 2015 some 25 per cent of the fund will be invested in the ‘green’ economy. As at 31 March 2012, around 13 per cent, or nearly £250m, of assets is invested in clean technology.
To reach its long-term objective of being fully funded on an ongoing basis by 2031, the fund would need a return of 3.3 per cent annually over gilts over the medium to long term. The risk objective is to limit the likelihood of a fall in funding to below 80 per cent in the 2013, 2016 and 2019 valuations.
Head of environmental finance and pension fund management for the Environment Agency Howard Pearce said: “We already invest in property and we now intend to look at investing globally in infrastructure, sustainably managed farmland and/or sustainably managed forestry. We want these investments to give us capital growth and be a hedge against inflation and climate change. We are looking for financial returns of >+5% real pa from these assets.
“We do not intend to invest in ‘green field’ property developments, intensive agridevelopments, tropical hardwood deforestation, or environmentally unsustainable infrastructure, all of which could accelerate climate change. If we cannot find suitable investments to meet our sustainability criteria, as well as our financial criteria, we will not invest.
“In the area of property investment, we are particularly interested in investing in energy efficient low carbon buildings. With respect to farmland, we are interested in investing in sustainable farming ventures that demonstrate good environmental stewardship of land, soil and water resources. For timberland, we are interested in investing in sustainable forestry that encourages greater biodiversity and provides environmental services. On infrastructure, this may include a range of renewables and public transport systems.”
The Environment Agency Active Fund has almost 22,000 members and manages around £1.9bn. The fund saw returns of 5.1 per cent in 2011, almost double the average of 2.6 per cent of the other 89 LGPS funds.