USS to stay with ‘risky’ assets despite market volatility

Peter Moon - who spoke at the European Pension Funds Congress in Frankfurt, yesterday - said USS had 90pc of its portfolio invested in "risky assets" and, as a result, had experienced some "consternation".

Moon said: "I think we read the crisis quite well, so we did underweight equities last year, but within our investment strategy. That means we still have 90pc of our portfolio invested in risky assets."

He said - in addition to seeing losses on the scheme's equities holdings and on other assets - USS suffered "modest losses" in its allocations to money market funds, pointing out only a few survived unscathed Lehman's collapse.

In line with its investment approach, Moon said USS was forming an investment team which could implement the fund's plan to invest directly in hedge funds.

Currently, he said, USS had an exposure to hedge funds through replication products.

Moon said: "We are going to approach any direct hedge fund allocation very cautiously. Alpha is very difficult to achieve."

In his speech to the audience, Moon also said investors had started to question the reliability of benchmarks and that risk measurement tools were very likely to be revisited.

APG chief strategist Wim Barentsen said valuations would be at the core of the debate generated by the crisis - as he believed assets had been generally overvalued during the last two years.

He added: "Dynamic asset allocation and risk budgeting are potentially powerful additions to portfolio construction."

Barentsen also pointed out the importance of market timing and how patience played a role in driving the most effective investment decisions.

Despite this, Oxera Consulting managing consultant Leonie Bell said pension investment policy could not be structured around the benefit of hindsight and ability to time the market.

She said: "There is the need for a pre-defined, suitable investment strategy."

Bell pointed out that investing in equities could deliver higher returns at comparatively low risk, given a long term investment horizon, as volatility of annualised returns and the risk of negative equity returns would fall significantly as the holding period increases.

She concluded: "Pensions are for the long term, so we need to avoid short term choices, whose price we will pay in the future."