Asset Allocation
The asset allocation based on the more granular asset classifications for the year ended 2023 (and restated for 2022), together with the respective weightings of the asset classes in total net assets is set out below:
|
(£m) |
2023 |
% of total |
2022 |
% of total |
|
Equities |
182,320 |
51% |
188,579 |
52% |
|
Bonds |
44,107 |
12% |
53,168 |
15% |
|
Property |
28,393 |
8% |
30,087 |
8% |
|
Infrastructure |
22,739 |
6% |
17,830 |
5% |
|
Private Equity |
22,012 |
6% |
20,637 |
6% |
|
Multi-asset credit |
13,204 |
4% |
12,856 |
4% |
|
Private debt |
11,076 |
3% |
6,647 |
2% |
|
Diversified Growth Funds (DGF) |
8,506 |
2% |
9,586 |
3% |
|
Liability Driven Investments (LDI) |
3,419 |
1% |
3,753 |
1% |
|
Hedge funds |
1,845 |
1% |
1,881 |
1% |
|
Derivatives |
438 |
1,156 |
||
|
Cash |
7,297 |
|
8,903 |
|
|
Other balances |
8,690 |
13,638 |
||
|
Total closing net assets |
354,047 |
368,721 |
* Percentages do not add to 100% as they show the individual asset classes as a proportion of total net closing assets (with no percentage provided for the non-investment asset class line items).
Investment Performance
The following market commentary is taken from analysis that was provided by Pensions & Investment Research Consultants Ltd (PIRC) in their annual review. It is based on analysis of a 'Universe' of 63 funds, representing some two thirds of local authority pension fund assets and includes all 8 of the Wales Pensions Partnership and the 3 Northern LGPS funds, all bar one of the London CIV funds, with funds from all other pools except LGPS Central.
Long-term returns on investment
Investment performance has been extremely strong. Over the medium term, the average fund has delivered a return of around 7%pa. A real return of 2%pa over 5 years and a 4.5%pa return over 10 years. Longer term results are stronger still at almost 8%pa, which is 5%pa above inflation.
Latest Year Returns
2022/23 was a good year for alternative investments, the only area to deliver positive results. Equity performance was flat – and most active managers failed to add value. Bond performance was deeply negative with diversified strategies performing least badly. Property saw a strong decline in values over the year.
Asset Allocation
There was almost no change in average asset allocation last year. Funds put more money into bonds but the large negative returns resulted in the allocation remaining unchanged. More money was committed to private equity but this has yet to be drawn down.
However, funds have reallocated 12% of total assets from equities into alternatives over the last decade. This has been the key structural change. Infrastructure has emerged into a significant proportion of assets.
At the same time, equities have declined over the last 30 years from three-quarters to only half of the average fund’s asset allocation. This was driven by concern over equity volatility and the increased focus on mitigating risk. The range of assets that could be invested in as an “alternative” to equities has increased exponentially.
Equity performance has been strong over all time periods. Property performance has been poor over the recent past. Rising interest rates, following government manipulated low levels, have made bonds the worst performing of the major asset classes and the only one that has failed to match inflation over the last ten years.
Investment Costs
The average management fee is 43bp, up from 34bp the previous year. There has also been an increase in performance related elements. At 21bp, the average fee 20 years ago was half the current level.
