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Unprecedented amounts of UK pension fund money are flowing into commodities as pension fund managers and trustees seek ways of increasing returns and diversifying risk.
Last month, J Sainsbury, the UK supermarket chain, said it planned to invest about 5 per cent of its £3.2bn ($5.5bn, €4.6bn) fund in commodities.
At the end of last year, Hermes, manager of the UK’s largest pension fund with about £34bn under management, launched a commodities fund into which it invested £1bn of its clients’ money. It was the largest single allocation to commodities by a UK pension fund and created one of the largest commodity funds designed to attract other pension funds shifting money into commodities.
Prompted by investment consultants such as Watson Wyatt, UK pension funds have increasingly been diversifying assets away from mainstream UK equity indices into “alternative” assets, such as property, private equity, hedge funds, private finance initiatives and commodities. More and more funds have begun to invest in gold, oil and grain as a way of counteracting the volatility of equity-biased portfolios.
The shift to commodities is part of a bigger move to restructure pension funds to find surer ways of funding long-term promises to pensioners.
Hermes cited research showing that over the past 50 years commodities and shares had provided similar real returns at about 5.2 per cent, compared with 1.5 per cent from bonds.
At the same time, commodity returns tended to move in the opposite direction to shares performing strongly during bouts of inflation.
“Two years ago it would have been hard to find any funds investing in commodities,“ says Stephen Woodcock, investment consultant at Mercer.
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