In October 2015 Newham LBC’s pension fund invested an initial £130m into its own managed platform for liquid diversified alternatives – our own fund-of-hedge-funds - with diligence being undertaken for a further £160m under way.
The journey started in 2013, Newham employed bfinance to undertake industry standard risk assessments across the fund’s strategic asset allocation. The results were shocking, with a 90% correlation to equity risk; clearly, attempts to diversify away from equities, whilst pursuing the level of growth required to close the funding gap, had failed.
So a programme of research was set in motion. How could Newham reduce equity risk and diversify in a managed fashion? After some review, the decision was taken not to employ a new fund manager but instead to look at how Newham could bring it in-house or work with a partner to deliver an alternative solution.
In stepped Chris Jones at bfinance who unveiled the art of the possible. Deborah Hindson, managing director of oneSource, the shared service provider for Newham and Havering LBC, sums it up nicely: “We all know the cost constraints that plague effective in-house management of LGPS funds, so we had to do something innovative.”
At the heart of the project was governance; a simple recognition that that once you step aside from the herd, you may feel exposed. The officers and elected members at Newham set about working very closely together to construct a governance framework to see the project through to completion, through transparent, step-by-step engagement and clear and precise expectations for the achievement of every milestone. Communication was everything.
Following a process that started with a universe of over 1,350 funds, we have arrived at a proposed final liquid alternatives portfolio of six funds. Every stage of this process has been designed to find a portfolio that best achieves Newham’s risk and return objectives and fits best with Newham’s portfolio overall. One of the early steps was to conduct a risk profiling exercise to note various limits and goals on return, correlation, risk and diversification to guide the process and members of Newham’s investment and accounts committee were briefed throughout.
Newham set a target return of 7% pa with a platform of six managers across the following strategies: systematic macro, commodity trading advisor, relative value/multi-strategy, and event-driven.
Chair of the investment committee Forhad Hussain (Lab) is rightly proud of the progress and commitment shown by his fellow members and the officers who supported him.
He says: “Having reduced the funding gap from the last triennial valuation from 28% to closer to 14% as of October 2015, 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.”
“We set out to deliver a transparent, genuine diversifier against our equity assets and we believe we have done that. Expectations on fees and performance are much clearer; on fees alone we expect to save around £1m pa. We have met our managers and understand their strategies, everyone concerned is determined to make this project a success and what is truly exciting is the level of member engagement for the governance of this platform.”
Ms Hindson adds: “Setting this platform up has required some significant uplift in terms of member participation and the lessons we have learned are now being reflected in the management of other elements of the fund’s asset allocation.
“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.”
Time will tell if the Newham experiment will be a success. What is certain is that rather than sitting around expecting the market to deliver solutions, one small team in the East End of London have set a precedent for innovation and governance to help drive forward investment performance for the benefit of the scheme members.
For more information on the development contact Stephen.Wild@onesource.co.uk.
Roy Nolan, head of financial control, Newham LBC