University pension fund ups emerging markets

LONDON (Reuters) - The second-largest pension fund is putting more money into emerging markets and hedge funds, as it moves to dilute exposure to stocks that left it reeling in the financial crisis, its chief investor said. The 31.6 billion pound Universities Superannuation Scheme (USS) is pouring an extra 320 million pounds into emerging market equities, while paring allocations to global equities from 62 percent to as low as 55 percent, Chief Investment Officer Roger Gray told Reuters.

Exposure to emerging markets will rise to 7.5 percent from 6.5 percent and is likely to rise further still, he said.

"I would not say 7.5 percent (in emerging markets) is the ultimate goal, but it is as far as we have set it at the moment. We should set that against the context where our overall equity exposure is reducing," Gray said.

The realignment marks a significant departure from the traditional strategies pursued by the fund, which is second only to the BT (BT.L) pension scheme in size.

Before Gray took the job in late 2009, the USS allocated about 70 percent of assets to global equities but lost about 7 billion pounds in the stock market slump following the credit crisis. Emerging market exposure was only around 5 percent of the fund.

HEDGE FUNDS

As it moves away from equities, the scheme will also invest at least 1.5 percent or close to 500 million pounds in hedge funds, aspiring to a longer-term target of 5 percent. The fund may even go a bit further than that, Gray said.

So-called alternative investments such as hedge funds fell from favour after the financial crisis as some proved illiquid, exposing investors to steep losses. In extreme cases such as the Bernard Madoff scandal the funds turned out to be frauds.

Gray said the USS's extra commitment to hedge funds is backed by closer scrutiny of their corporate governance practices.

"The area where over the last few years we have evolved is applying that (corporate governance scrutiny) to the full range of our investments, including hedge funds, he said.

"Is the board of the hedge fund constituted in a way which gives us assurance that they are actually acting in the interest of the limited partners rather than in the pocket of the managers?" he said.

An increase in the scheme's strategic allocation to fixed income, which is also part of the diversification plan, has been "progressing slowly" towards its target of 15 percent.

Having reached 12.5 percent, Gray said it was "only a question of timing when the next move takes place ... It will be incremental steps, rather than dramatic steps."

(Editing by Chris Vellacott and David Holmes)

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