The £1.9bn Environment Agency Active Pension Fund has revamped its investment strategy by increasing its allocation to active emerging market equities, corporate bonds and “climate friendly” real assets.
Over the next two years the fund will increase its actively-managed corporate bonds from 13.5% to 28% and its allocation to real asset investments through sustainable property (5%), infrastructure (3.5%) and farmland/forestry (3.5%).
The fund is investigating ways to build up a new allocation of up to £220m in real assets made up of £90m in sustainable property, £65m in infrastructure and £65m in timberland/farmland.
Environment Agency head of environmental finance and pension fund management Howard Pearce said real assets offer capital growth and a hedge against inflation and climate change.
He added: “We are trying to keep it simple by investing in something we understand, is tangible and has scope for growth.”
This however comes at the expense of passively-managed public equities and gilts. Over the next two years the fund will reduce its public equities from 63% to 50% and reduce index-linked gilts from 13.5% to 5%. Elsewhere, it will maintain its private equity allocation at 5%.
Within the equity allocation the fund will increase actively managed emerging equities from 4.5% to 10%.
“Emerging markets have young populations, consumer demand and are more likely to have growth than developed markets,” said Pearce.
The fund will develop three new actively managed mandates to be funded from passively-managed assets.
It is now searching for fund managers for a low volatility global equity mandate (up to £165m), a new emerging market mandate (up to £65m) and a global bond pooled fund mandate (up to £100m), while other mandates for the real assets will follow.
The fund’s current investment strategy and strategic asset allocation was set in 2005 and has been actively maintained since then with only a small variance being evident in March this year.
As part of the new approach it now has a framework in place of acceptable ranges for asset allocation.
The long-term investment objective is to be 100% funded by 2031 and over the shorter term for 25% of the fund to be invested in the ‘green’ economy by 2015 – as at 31 March this was about 13%.
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