“It must be incredibly frustrating to be an asset manager right now. I do have a certain amount of sympathy for them.”
Denise Le Gal, the newly appointed chair of board of Brunel Pension Partnership, is well placed to empathise with fund managers, having had a career that includes five years as a director at Chase Manhattan Bank and three as head of sales at IBJ International, as well as a political career as a Surrey councillor and chair of the pension fund committee.
Ms Le Gal knows, therefore, the pressure of the industry to meet client needs and maintain relationships, which can often be said to clash with the cautious governance procedures of public sector investors.
Ms Le Gal, speaking to LGC at the Investment Summit, described fund managers’ job of maintaining relationships with Local Government Pension Scheme funds as they transition to pools as “adifficult balancing act”.
On the one hand, they must retain existing mandates with individual funds and look to win contracts with pools to potentially serve more funds. On the other, they must give funds and pools space to develop their new structures – and some managers fear pooling might make the LGPS less profitable for them.
“They’re trying very hard to be helpful. I feel sorry for them but at the end of it, there are going to be some very large mandates and that’s really attractive,” said Ms Le Gal. Brunel is fast evolving into an asset management company in its own right. It was formally created as a company in July, and hired State Street as its custodian in September. Ms Le Gal said Brunel has also made all its major appointments to the board; four executive and four non-executive directors.
The next step, once Brunel has achieved authoritsation from the Financial Conduct Authority, will be to tackle the implementation of the pool.
Chief executive: Dawn Turner, former chief pensions officer at the Environment Agency
Chief investment officer: Mark Mansley, former chief investment officer at the Environment Agency
Chief compliance and risk officer: Laura Chappell, former head of risk at Brewin Dolphin
Chief operations officer: Joe Webster, former global finance director for equity trading, Deutsche Bank
Head of private markets: to hire
Head of investment committee: Frederique Pierre-Pierre, former chief operating officer of the UK arm of Deutsche Bank
Head of risk committee: Mike Clark, former head of responsible investment at Russell Investments
Head of shareholder engagement: Steve Tyson, senior adviser at Allenbridge
How the pool will work
Ms Le Gal explained the next step for Brunel will be to finalise the design a series of around 22 portfolios within the pool, comprising different asset combinations, from which member pension funds (the pool’s clients) can choose.
“We’ve got a broad base of the sort of portfolios that we want to have. At the moment we’re just working with the individual clients to see whether that has changed from when we did the submission last July,” said Ms Le Gal.
“Once we have broad agreement [the] investment team will start shaping that into something more concrete and then we’ll be talking to our existing fund managers and other fund managers who have expressed an interest in working with us,” Ms Le Gal said.
Brunel’s member funds will have relatively little control over the specific managers with whom they invest, Ms Le Gal explained.
“[The clients] will set their own strategic asset allocation, so they’ll say, ‘we want 10% in global bonds, 20% in UK bonds’ and then they hand it to us,” she said.
“We will create appropriate portfolios to meet those requests. They won’t be able to pick a specific fund manager.”
Ms Le Gal said it was important for Brunel to “build trust” with member funds because they may perceive this as a loss of control.
“They may feel they’re losing something by not being able to pick their fund managers, and if they have had fund managers that are really strong and good performers, I can’t really blame them for that,” she said.
Ms Le Gal added member funds will be able to make the case for the pool to bring particular assets on board, but only if there is enough demand within a pool to make this worthwhile.
“If there are new ideas that are percolating, then we might circulate that to everyone [in the pool] saying there has been some interest in this area, so if enough people are interested and there is sufficient mass to make it worthwhile, we’ll have a mechanism by which we can create that,” she said.
The possibility of having more than one fund manager offering similar products within the pool has not been ruled out, Ms Le Gal added, because in some cases this would be more practical and less risky than having all member funds’ investments in a particular asset class with a single manager.
“[Local Pensions Partnership], for example, has three global equity portfolios and they’re £1bn each. If you’d had just one that would be a £3bn mandate; that’s really big,” she said.
However, even if the pool brings on several managers offering similar products, pension funds themselves will not choose which one they invest with, Ms Le Gal said.
“There won’t be any choosing by the back door,” she confirmed. “If we have three global mandates and [they are], for the sake of argument, Goldman Sachs, Morgan Stanley and Invesco, as the client, all you will say is, ‘I want 10% in global equity’, and then the pool will invest it how it sees fit,” said Ms Le Gal.
In part, the pool will base the decision of to which of a set of similar managers to allocate client money on the individual managers’ offers. For instance, Ms Le Gal explains, “you can have three global mandates that look very different in terms of whether it’s a value one, or a growth one, or an income one”.
Ms Le Gal was clear the aim of the pool was to rationalise the number of managers in total serving the 10 clients. “The total current number of mandates well exceeds 100. We will be bringing this down to around 60,” she said.
The direct role the pool will take in allocating funds’ assets to portfolios raises issues when individual funds reset their investment strategy every three years to reflect the way their liabilities, and therefore risk profiles, change over time.
“It’s something we’ve given a lot of thought to, but we don’t necessarily know the answer,” said Ms Le Gal. She added part of State Street’s role will be to measure the performance of the pool’s portfolios, allowing clients to see “which strategies are producing better returns and why”.
“We think there might be a convergence of strategic thinking within our clients,” said Ms Le Gal, excluding “historic anomalies” within fund’s existing portfolios such as private equity or infrastructure investments into which funds are locked for a certain period of time.
Co-ordinated investment in infrastructure is another purpose of pooling. Ms Le Gal said Brunel was “not quite there yet” when it came to its infrastructure plans.
“But the spirit of it is, we want to invest in infrastructure and we want to do it in an efficient way, so there’s no point in eight LGPS pools going after the big flagship national deals and competing with one another on pricing,” said Ms Le Gal.
She said Brunel was involved in the cross-pool collaboration group on infrastructure, which had been investigating the possibility of a national infrastructure pool through which LGPS funds could collaborate, but added: “As of yet, there’s no one fixed solution.”
Brunel’s manager needs
Transparency, a sound approach to responsible investments and close attention to tax implications are the top three attributes Brunel will look for in its fund managers, Ms Le Gal said.
“What we will be looking for is fund managers who have a clear direction on sustainability, because that’s really important to us; it’s got to be part of their DNA,” she said.
“Of course [managers] will have to be competitive, because [these] will be big mandates, and we’ll be wanting them to have thought through what are some of the tax implications for us; it’s one thing to state your cost but if it has tax implications for us that makes it less attractive.
“Cost transparency is much higher on the agenda nationally, not just within the LGPS, and with Mifid II there are those considerations as well.”