Charlotte Moore analyses each pools’ approach to investment across both conventional and alternative assets.
As one of the first movers, the London Collective Investment Vehicle is the most advanced pool. Of the total 32 London boroughs represented by the pool, 30 have pooled their funds.
By April 2018, London CIV had pooled about £15bn of the £35bn owned in total by local authorities, equivalent to 40% of total assets under management. Eleven funds had been launched by 1 April, with a 12th announced on 18 April. These are equity and multi-asset funds.
This first phase was a straightforward ‘lift and shift’. Mark Hyde-Harrison, chief executive officer of the London CIV, says: “We identified those managers where there was communality among the boroughs and launched funds which fitted that profile.” Not only have existing assets been transferred into these funds but so have new contributions.
The second phase is the launch of a range of fixed income and credit funds. Mr Hyde-Harrison adds: “These funds will provide access to multi-asset credit, private debt and illiquid strategies, which will offer diversification in combination with reasonable returns.
LGPS Central chief executive officer Andrew Warwick-Thompson has set out his stall for the pool in some detail in an interview with LGC.
But, in essence, in January Central received approval from the FCA to operate as an asset management company, which is fully owned by its partner funds. Shortly after this, it received approval for its first three sub-funds for its pooling vehicle, which is an authorised contractual scheme (ACS).
Our partner funds chose this option because it has tough governance requirements and is regulated by the FCA
Andrew Warwick-Thompson, LGPS Central
Mr Warwick-Thompson says: “Our partner funds chose this option because it has tough governance requirements and is regulated by the FCA.” At the beginning of April, the pool received the transfer of the first tranche of assets, which amounted to about £5.5bn. The first three funds are all systematic equity funds that replicate existing strategies among the partner funds.
Border to Coast
Border to Coast is working towards a July launch target, which will start with the transfer of the majority of the assets managed internally by Teesside, East Riding and South Yorkshire. These are actively managed, low-risk, equity strategies that target a 1% outperformance of the index.
Chief executive officer Rachel Elwell says: “We’re on track on to go live with UK and global-developed equities funds as well as emerging market equities.” This will correspond to an asset transfer with a value of around £10bn.
The next phase will be a two-year transition plan, which involves the launch of collective investment funds across different asset classes and risk profiles.
Ms Elwell says: “We will start with UK and global equities, and looking at how we could invest in alternative assets,” adding that the partnership will move onto fixed income, property and other wider asset classes during 2019 and 2020.”
She adds that the pool will launch externally managed sub-funds in those asset classes where they lack the internal capability. “That includes a UK equity fund, with a higher risk and return target than those managed internally,” says Ms Elwell.
Rather than set up its own investment vehicle, Access decided to appoint Link Fund Solutions to act as the pool’s FCA-approved authorised operator. This decision was largely shaped by the partner funds only using external fund managers.
Andrew Reid, chairman of Access, says: “We decided to outsource the management of the pool as we felt it was more effective to outsource because we lacked the necessary internal expertise.”
Access does not, however, rule out running the pool in the future. Mr Reid says: “We recognise there may be long-term value from having your own vehicle but first we want to learn from a third-party operator.”
While the authorised contract scheme is still in the process of being established, the pool appointed UBS in February to manage its passive mandates. Mr Reid says: “This mandate will be for around £11bn, around 25% of our assets under management.”
We recognise there may be long-term value from having your own vehicle but first we want to learn from a third-party operator
Andrew Reid, chairman of Access
The first sub-fund is likely to be an actively managed global equity fund, which is expected to be approved by the mid-summer of this year. Around another 12 funds are expected to be launched in the next year.
“These funds will predominately be equity and fixed income and will have assets under management of around £15bn,” says Mr Reid.
Between 2019 and 2021, another £8bn will be transferred to the pool, accounting for about 80% of all the funds.
Wales Pension Partnership
Like Access, Wales decided to appoint Link Fund Solutions as the operator of the pool, rather than managing it internally. A lack of internal resource was one reason the partnership made this decision: there are currently no investments within Wales managed by the partner funds.
Anthony Parnell, treasury and pension investments manager at Carmarthenshire CC, says: “In addition, we are a relatively small pool of £16bn so it doesn’t make economic sense for us to build at this stage.” The assets are held by eight Welsh funds.
Passive investments were pooled even before it was mandated by the government. This was implemented three years ago and the assets under management are currently £3bn, equivalent to 19% of the total assets under management.
The partnership is currently finalising the prospectus for the first tranche of investments, which will be two global active equity sub-funds.
Russell Investment – partner of Link Fund Solutions – proposed the two global equity sub-funds. These were then passed on to the joint governance committee. Once they had accepted this proposal, it was discussed by each pension committee.
Mr Parnell says: “Some funds have decided to allocate to both funds, while others have only opted for one fund.”
The second tranche of investments will be actively managed UK equities along with fixed income. The third tranche will be any remaining equity allocations.
Mr Parnell says: “For each fund, we inform Russell of our strategic asset allocations and benchmark returns. Russell then recommends a selection of managers to fit this brief.”
Brunel Pension Partnerships
Brunel has set up four passive equity portfolios – UK, developed, emerging market and low-carbon funds. Legal & General Investment Management has been selected as the manager of these funds. It is currently working on the transition to set up and fund these portfolios.
The pool is now looking at the next round of portfolios to offer its partner funds. Mark Mansley, chief investment officer at Brunel, says: “We are currently evaluating our smart beta proposition and have gone out to the market for tenders on actively managed UK equities and low-volatility global equities.”
Even though assets have yet to be transferred into the selected portfolios, they have been transferred to the pool’s custodian. Mr Mansley says: “We will provide an increasing oversight over those assets.”
When deciding which portfolios to offer clients, the pool tries to strike a balance between offering a wide range and too narrow a selection. Each portfolio is based on objectives so it has a clear risk-return profile. Mr Mansley adds: “Some portfolios will be single funds but others might consist of a number of managers, such as a multi-asset credit fund.”
Brunel announced last month that its ACS will be operated by FundRock Management Company.
Local Pension Partnership
LPP is different from the other pools. Despite being one of the smallest, like London CIV, LPP has been trailblazer. Susan Martin, chief executive officer of LPP, says: “It was our approach which helped demonstrate to government the benefits of pooling.”
The partnership is not, strictly speaking, a local authority pool. It started life as the London Pension Fund Authority, which was established in 1989 to administer the pension fund of the dissolved Greater London Council, three years earlier.
In 2016, this fund merged with Lancashire County Pension Fund to form the LPP. It will have £16bn under management when the Royal County of Berkshire Pension Fund joins it this year.
Our philosophy puts risk management at the heart of the business, which means a focus on managing the liabilities
Susan Martin, LPP
The LPP provides pensions administration, consultancy, risk and asset liability management as well as investment services. The other pools focus only on investment. Ms Martin says: “Our philosophy puts risk management at the heart of the business, which means a focus on managing the liabilities.”
While the pension funds must retain responsibility for their strategic asset allocation, the partnership helps them to set their investment strategy as well as understanding their risk appetite.
LPP has pooled assets with a value of about £10bn in listed equity, private equity, infrastructure, credit and fixed income funds. Within the listed equity allocation, around 40% of the assets are managed in-house with the remainder managed externally.
As Phil Triggs has highlighted previously, the £46bn pool – one of the largest (and almost a fifth of total LGPS assets) – will comprise pooling of alternative investments, not listed assets.
In March it appointed Ian Greenwood, deputy chairman of the West Yorkshire Pension Fund and deputy chairman of the Local Authority Pension Fund Forum, as its chairman. Mr Greenwood replaces Kieran Quinn, who passed away unexpectedly just before Christmas.
In April it also appointed Northern Trust to provide a broad range of custodial and administration services, including securities lending, private equity fund administration, compliance monitoring and carbon reporting.
Investment in UK infrastructure will be a key focus, says Mr Greenwood. “We have a target of financing the construction of 10,000 new homes over the next three years, using a wide range of funding approaches.
“To help achieve this, we’ve established GLIL, a £1.3bn infrastructure vehicle alongside LPP, which has already invested £765m in both greenfield and brownfield direct UK infrastructure assets. We would be delighted to welcome any other pools who would like to participate with us.
“By adopting a common proxy voting policy, the Northern Pool is able to reflect participating funds’ alignment on environmental, social and governance (ESG) issues, and to use the weight of our combined assets to engage with companies to enhance shareholder value.
“And we’ve set up a collective private equity investment vehicle (NPEP) with commitments of around £1bn to private equity funds through to 2020.”