UK - Hermes Pensions Management has announced a £1bn commodities investment on behalf of its owner and client, the £34bn BT Pension Scheme (BTPS).
According to Hermes, the maiden investment, which represents 3% of BTPS’s total funds, is the largest single allocation to commodities of any institutional investor in the UK.
James Walsh, head of strategy and alternatives at Hermes, said it was possible the allocation could be increased over time. “We haven’t got any plans to increase it at the moment but if you look at the asset liability modelling that can be done, there is an argument for an increased allocation,” he said.
The investment was made via the open ended Hermes Commodity Index Fund (HCIF) which tracks the price performance of commodities on the Goldman Sachs Commodities Index (GCSI). The BTPS investment will track the GSCI Light Index which has a modified weighting to the energy component, oil and gas.
Hermes said this passive mode of allocation was the most cost effective approach, and that a move to generate significant out performance at this early stage would be overly complex, expensive and reliant on finding skill-based managers.
But Walsh did not rule out the possibility of an active approach in future. “It is quite possible,” he said.
Walsh added that he hoped other UK schemes would follow BTPS’ example: “Adding commodities is especially effective at diversifying a fund’s investments and counterbalancing equity volatility, but potentially capturing high returns.“All schemes with a substantial allocation to equities should seriously consider adding in commodities – initially through tracking an index.”
The allocation was decided upon in Q3 2005, on the advice of Hermes. It complements the BTPS’ recent investments and increased allocations to other alternatives including 2% to hedge funds over the past 16 months, plus allocations to private equity and private finance initiatives.
In related news, PGGM, the e71.5bn Dutch pension fund for the healthcare and social work sector, reported a -13.8% return on its commodities allocation in Q4 2005.
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