IRELAND - Commodities can exceed equity returns over time while providing a good source of diversification in a scheme portfolio, Hermes head of commodities Colin O'Shea said.
Speaking at the 2010 Irish Association of Pension Funds Investment Conference, he said commodities provide better positive forward-looking risk premium than equities.
O'Shea compared the risk return profile for commodities and equities since 1970, using 10-year US government bonds as a proxy for scheme liabilities.
Total returns for commodities were 10%, while equities yielded 9.3%. When compared to liabilities commodities offered a 1.9% premium, while equities only 1.3%.
In addition, O'Shea showed that by adding commodities to a pension fund portfolio its returns increase and the risk associated decreases.
He did a simulation with a portfolio which has 60% allocated to equities, 30% to bonds and 10% to properties. He switched 5% of equities into commodities and the overall return increased to 6.3% from 6.1%, while risk decreased to 8.6% from 9.2%.
If 10% of equities were to be switched into commodities, then returns increased to 6.6% and risk decreased to 8.2%.
In a separate presentation, the UK's Universities Superannuation Scheme (USS) co-head of responsible investment David Russell explained responsible investment is not based on "ethical" considerations, but focuses on long term performance issues related to the environmental, social and governance (ESG) aspects of an investment.
Russell - who is a member of the United Nations Principles for Responsible Investment (PRI) Management Oversight Committee - said while the market has a short term focus and ignores many issue, pension funds need to evaluate how long term issues impact the long term value on which they invest.
He added: "Even though USS is a large investor we might own at best, say, 0.5% of a company's shares. Therefore our ability to influence a company's decision will always be limited. However, if we get together with other pension funds we can get to 10% of a company's shares. The PRI encourage investors to work together to be more effective."
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