| The BT pension scheme realises UK's largest commodities investment |
|
|
| 22/01/2006 | |
|
Hermes Pensions Management, which is entirely owned by the British Telecom Pension Scheme (BTPS), has invested £1 billion into commodities on behalf of its owner. The investment has been entirely made in the Hermes Commodity Index Fund (HCIF), one of the largest commodity funds ever created. To date, this is also the largest single allocation to commodities of any institutional investor in the UK. The BTPS has decided to invest passively, on the basis that it would get a "simple, efficient and highly cost effective" exposure to commodities. "Seeking to generate significant out performance from commodities, at this early stage of the allocation, was deemed to be overly complex, expensive and reliant on finding skill-based managers", argued Hermes. The HCIF, which has four share classes (£, US$, €, and ¥), will track the price performance of the Goldman Sachs Commodities (GSCI) Light Index, based on 24 different commodities. Unlike its regular version, the GSCI Light Index has a modified weighting to the overall energy component (oil and gas) based more on the historic weight of the energy sector. "This decision was made to reflect current concerns around the recent run up of energy prices and their aggregate weighted effect on the index", explained Hermes. Oil and gas account for about 75% of the dollar weight the regular GSCI index According to research by Hermes, an investment in commodities, with other alternative investments, will result in an overall improvement in returns and a significant reduction in volatility across a portfolio of investments. "Adding commodities is especially effective at diversifying a fund's investments and counterbalancing equity volatility, but potentially capturing high returns", said James Walsh, Head of Strategy and Alternatives at Hermes. The fund manager reported that over the last 50 years, commodities and equities have provided similar real returns in excess of 5.0% pa (compared to bonds at approximately 1.5%). However, the two asset classes react differently to various market settings. For instance, commodities tend to perform better in inflationary periods or at moments when equities (and bonds) come under severe pressure, according to Hermes. It added that commodities have also historically achieved a higher rate of excess monthly returns compared to equities (or bonds). As a result the inclusion of commodities in a portfolio of investments can significantly decrease the downside risk of the portfolio. By contrast bond investment may lock in lower returns. The BTPS, which has recently completed various alternative investments might however be investing at a juncture point for commodity prices. PGGM, Netherlands's healthcare workers pension fund, which invests about 5% of its assets into commodities, said that commodities had returned -13.8% in the last quarter of 2005, being unable to sustain record high oil prices of the previous months. J.L. |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it