When selecting asset managers to invest in, Northill opts for those who focus on just one product or asset class and when it comes to the firm’s stock selection philosophy, Little is uncompromising in his belief there is too much underweighting in the industry.
“If you like it, own it,” he says of stocks. “If we have underperformed, then sack us.” Many believe there is still very much a place for active management and the government should afford schemes the flexibility to allocate a certain amount to good active equity managers rather than shift to passive.
State Street Global Advisors (SSGA) UK head of institutional clients Mark McNulty says: “I would be in favour of leaving some scope for schemes to allocate to active managers. Maybe 10% of their developed market equities could be available for investment on an active basis.”
Delegate or get smart
The governance quandary can essentially be addressed in two ways: by improving inhouse governance or delegating the investment process to a third party. Seeing as the former option is out of the question for a lot of schemes at the smaller end of the spectrum, those lacking the governance budget to fully embrace active management could take on a third party as a fiduciary manager.
Aon Hewitt’s Giles says: “The losses from going in a passive vehicle can pay for a lot of governance, which would bolster a scheme’s ability to pick the right managers. If you have the governance, get active and get busy with it and the other is a fiduciary type of approach. If the governance budget is an issue, you outsource it.”
Another consideration is how investors can become smarter with their beta exposure. Much has been made of the inefficiencies of market cap-weighted indices and investors are looking for more innovative ways to capitalise on their core passive allocation. As a result, the industry is looking closely at alternative indices or smart beta.
“You can conceive a situation where there is an allocation to market cap and advanced beta,” says SSGA’s McNulty. “We are seeing a strong demand from local authorities for advanced beta.”
Whichever way the consultation pans out, it seems inevitable that somewhere down the line there will be less actively managed equity funds in the LGPS. As a result, the use of passive vehicles will grow, but rather than undergo a wholesale shift to indices, investors will have to become smarter about both their active and passive strategies
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