Newham LBC’s pension fund has created its own platform for “liquid diversified alternatives” – an in-house fund-of-hedge-funds - to cut investment management fees by £1m per year.
Writing exclusively for LGC, Newham’s head of financial control Roy Nolan (pictured) said the fund had already invested £130m into six hedge funds on the platform and plans to invest a further £160m.
Newham also believes that other LGPS funds could use the alternatives platform in a pooled arrangement, tying in with the government’s drive for greater collaboration within the scheme.
Newham’s fund had a value of £904m in March 2014. At that point, it held 55% of its assets in equities, 15% in fixed income, 10% in property, 6% in cash, 4% in private equity, and 3% in infrastructure.
A further 7.8% of its fund - £70.5m – was in a diversified alternatives portfolio managed by Morgan Stanley. This portfolio, which largely comprised hedge fund investments (42%) but included other alternatives such as private equity and high-yield bonds, returned 4.5% over 2013-14.
However, following a review of risk across the scheme in 2013, Newham found that its total portfolio, including alternatives, bonds, and property, was 90% correlated to equity risk and so vulnerable to stock market volatility.
Newham decided to revamp its alternatives allocation to protect against this equity risk and, rather than hiring a new investment manager to do it, to bring the management of these investments in-house.
Newham worked with investment consultancy bfinance to select six hedge funds using different investment strategies for its in-house platform, for which it has set an annual return benchmark of 7%.
Quoted in the article, Forhad Hussain (Lab), chair of Newham’s investment committee, said: “We believe it is an appropriate time to reduce equity risk, avoid unnecessary volatility and seek equity-like returns from alternative assets to help us further close the funding gap. On fees alone we expect to save around £1m pa.”
Also featured in the article was Deborah Hindson, managing director of the shared service provider for Newham and Havering LBCs, OneSource. She said: “We believe this is a truly viable option for other LGPS funds to access alternatives via a pooling arrangement. We would be delighted to speak to colleagues and share our knowledge. We believe this is a real solution for combined investment.”