Scottish Widows has announced plans to enhance its asset allocation strategy in response to lower projected returns and potentially long-lasting volatility as a result of the coronavirus crisis, following a strategic review.
The changes, which will be implemented in phases from the third quarter of this year, are touted as a means of achieving “better returns for the same level of risk”, and include a move toward greater diversification in the Scottish Widows Pension Portfolio Funds and Retirement Portfolio Funds.
The report details how this is to be achieved by introducing new asset class portfolios and rebalancing away from UK equities and bonds.
Modelling for the review was carried out by Moody’s on behalf of Scottish Widows and concluded, among other things, that a higher allocation to emerging market government debt “was positive overall”, while a small allocation to cash should be made in lieu of gilts that continue to offer “historically low yields”.
Maria Nazarova-Doyle, head of pension investments at Scottish Widows, said: “We believe strategic asset allocation has the biggest impact on long-term performance. Selecting the types of assets used and combining them into the most effective blend is typically held to account for around 80 per cent of the performance of any multi-asset fund.
“We regularly review and adapt our multi-asset funds as the market environment changes, and it’s clear that the investment outlook is shifting, exacerbated by the Covid-19 impact.
“We’ve introduced these significant changes to ensure customers benefit from the new environment.”
Asked whether the rebalancing away from UK equities and bonds, parsed as a reduction in ‘home bias’, indicated pessimism in its outlook for its UK investments, Ms Nazarova-Doyle said: “It doesn’t reflect a house view on UK or US equities.
“The changes to our equity mix are intended to address some structural anomalies around the current prominent UK home bias and significant deviation from a market-cap benchmark for overseas equities,” she explained.
According to the report, UK equity allocation across all four of Scottish Widows’ pension portfolio funds is to be cut from around 30 per cent to 20.5 per cent.
“We are not intending yet to entirely remove the home bias, but to reduce it,” Ms Nazarova-Doyle said.
“We have taken steps to gradually reduce the UK equity exposure in our funds over the years. Following this review, we consider that a further reduction to around 20 per cent achieves an appropriate balance between UK investors’ preference to have some overweight to their home market and market-cap weight.”
Illiquid assets remain impractical
A move to incorporate illiquid investments into the defined contribution space has been rumoured for some time, especially in line with the government’s push for scheme consolidation.
In March, pensions minister Guy Opperman said in a speech that the government may make changes to facilitate investments in “illiquid investments and certain higher-risk sectors”.
While it did consider real estate investment trusts and listed infrastructure, Ms Nazarova-Doyle said: “Given the nature of the Pension Portfolio Funds (low cost, high liquidity) we did not consider any illiquid assets at this time.
“We are allocating some of the assets to Reits, but listed infrastructure was discarded due to the high carbon footprint that would result from the current passive investment options available, which goes against what we are trying to achieve from an ESG perspective,” she explained.
“However, we will continue to investigate opportunities in private markets and aim to include this in future reviews.”
Benjamin Mercer is a reporter at FTAdviser's sister publication Pensions Expert
