Border to Coast Pensions Partnership CEO Rachel Elwell tells Mona Dohle about the challenge of developing a common investment strategy for 12 LGPS schemes.
Border to Coast went live at the end of July with the launch of two equity strategies. How is the asset transfer process progressing?
Local government pension schemes (LGPS) in general are heavily invested in equities. This is a bit different from private sector pension schemes, which over the past few years have undertaken a de-risking journey. There are good reasons for this due to the LGPS sector generally being less mature. Only about a third of our liabilities are pensioners, so some of the drivers to match assets to liabilities don’t currently exist within the LGPS pools.
If you are thinking about how to ensure that you move fast through the transition, equities would be the obvious asset class to start with. That is a trend we can see across all the pools, partly because it is the biggest asset class we are invested in and partly because it is also a relatively easy asset to pool.
The other thing that is important for us is that we have 12 partner funds and three of them – East Riding, Teesside and South Yorkshire – are internally managed. In order to create the pool, we knew that we had to transfer the investment staff from these internally managed funds. We didn’t want to transfer the investment staff without also transferring as many of the assets as possible. If the partner funds had the assets and we had the staff that wouldn’t work very well. We knew that we were going to launch the internally managed capabilities first so that we are minimising that period where the staff are in our organisations but the assets are still with the partner funds. We now have the pooled assets but also the advisory mandates where we have the staff but they still have the non-equity assets.
The pool has £47bn of assets, but why has only a small fraction of that, £7bn, been launched as pooled funds?
There was no way that we would be able to pool £47bn of assets in one go, which would have been risky. It was agreed that it would take us two to three years to get the assets across. In the submission that we made to central government in July 2016, we outlined how long it would take us to transfer the assets in. There are a quite a few points in the submission that are still true now. One of them is that we are not looking to pool passive
assets in the short to medium term.
It is not particularly cost effective to pool these assets when they are being pooled already with some of the big asset providers (other pools, such as Access, have focussed their cost saving efforts on pooling passive assets.) At the moment, of our £47bn of assets, about £10bn is passively managed. That’s a strategic decision taken by the partner funds and the investment decisions on that remain with them. So at the moment there is about £10bn that we wouldn’t envisage transitioning directly into the pool. We have an emerging market equity fund that will be launching in the autumn and an externally managed UK equity fund which is currently being established, the closure date for submission from asset managers was the end of July and we expect to announce the successful firms during October.
We are also working with our partner funds on a global equity fund which we expect to launch in late Q1 2019. The invitation to tender for this fund is expected to be issued in December, with sessions for interested managers during November.
This seems quite unusual. So some of the funds that you have decided will be externally managed are UK equity funds, whereas emerging market and global equities are funds that you are planning to mange in-house?
We will be managing emerging markets in-house. We already have a global equities fund, part of that is an overseas fund and a UK equity fund that are managed internally, but we will also be launching an externallymanaged global equity fund with slightly different risk characteristics.
Is that because of the expertise you have in your team? A lot of UK pension funds tend to outsource their emerging markets interests and be more confident in their analysis of the domestic market.
It’s partly to do with the resources we have and partly due to our investment process. We are comfortable managing the type of global market equity exposure that the particular fund has.
What strategy does that fund have?
It’s not trying to blow the lights out but it is also not pseudo tracking indices. It’s targeting to beat a market index by +1% over the long term. Whereas what we would be looking for in an externally managed global equity fund that includes emerging market equities is something with a slightly higher conviction.
Speaking of the expertise you have in your team, you already have quite a few portfolio managers specialising in equities.
They come with 15 to 20 years experience of managing assets, in East Riding and South Yorkshire, in particular.
Will it be a challenge for them to go from the smaller number of individual assets they were managing before to taking responsibility for a significant chunk of the pool’s assets?
Well it is and it isn’t. We have combined three funds and we also combined the team of managers so they are still managing broadly the same size of assets, it is just that it becomes a bigger number when you put it all together.
Last month you organised a few asset manager days, so are you in the process of appointing external managers?
That’s right. We want to make sure that we are establishing partnerships within the asset management industry. We do have internal asset management capability, but we are not trying to do everything. We know what we are good at and we also know that we need to partner with asset management firms to make sure that our partner funds get the full service they need. We saw more than 130 asset management organisations and had some good, open debates over how we saw things progressing and the sort of relationships we wanted to have with the industry. The feedback we received was positive. It was a good start but we need to keep going.
We were pleased by the high-quality submissions we received from the asset management industry for our first invitation to tender for our UK equity fund. There will be three mandates for the fund, and we are creating a blend of managers using a complementary approach to try and create a fund that will provide sustainable long-term returns and be robust through the economic cycle. It is likely that we will take a similar approach to the global equity fund due to launch next year.
There are of course seven other local authority pension funds which are also in the process of pooling their assets. Are you looking at what they are doing?
Yes, that is true. You could say that we are working together. Whilst LGPS comprises eight different funds, ultimately we are part of a bigger project and it is, of course, public money that we are investing. So any sense of competition rather than collaboration is not really what we want. We are actually sharing experiences and I am in close contact with my fellow chief executives, which is definitely contributing to crosspool thinking.
Border to Coast recently appointed Robeco to execute its shareholder engagement policies. Considering that the pool consists of 12 authorities, how did you overcome differences of opinion to define your ESG strategy? Yes, it involved a lot of hard work from a lot of people. We are fortunate that we have an experienced responsible investor in Jane Firth, who has been on the responsible investment executive team of the LAPFF for about five years.
She joined from the South Yorkshire Pension Authority to become head of responsible investment. She believes in helping each of the partner funds to bring all of their thinking together to create a policy that they have all bought into. We did that over the summer of last year and a responsible investment policy guideline was agreed with the partner funds last year.
There was always a danger that it would be the lowest common denominator or be so vague that you couldn’t implement it. Actually, they did a fantastic job collectively and it did require people coming together and being pragmatic but to the extent that our guidelines were detailed enough that we could be quite clear with Robeco.
There are two aspects to the engagement services Robeco is providing. One aspect is their advice on voting, in line with our ESG policies. So they are looking at all the holdings that we have and upcoming actions. They are giving us advice on what the implications are based on our voting guidelines, on how we should vote. We then review that advice before voting. So all of our votes are very much in line with our internal voting guidelines, but we work with Robeco to make sure that they are embedded in their processes.
The second aspect is engagement. It is an important part of the responsible investment process so we want to make sure that it becomes a part of what our portfolio managers are thinking of before making an investment decision. Over time we are hoping to do a lot more of the engagement ourselves and our portfolio managers will be able to do that, particularly in the UK. Obviously we have global holdings so we were looking for a provider with global reach who is happy to work closely with us and who has a similar philosophy to us in terms of ESG criteria. That was why we chose Robeco to work with us.
What are those similarities?
If you look at how Robeco identifies the areas it wants to engage in, there is a significant overlap in the areas we want to engage in. One of the things we like about Robeco is that it has a strong measurement philosophy. They are clear in terms of where they want to engage and how they measure the impact of that. For us, responsible investment is about making a difference with our long-term investment outcomes. So we are able to
understand clearly and transparently how those things would work.
They obviously have a lot of resources and are able to measure impact in a different way, but we are able to help them in the areas where we have specific expertise or interest, such as climate change risks for our partner funds. Transparency is important for the public sector, in terms of embedding responsible investment in our investment processes, pushing companies towards being transparent with their shareholders and to work with them if things need to change.
Robeco is offering the same services to other funds; could there be a risk of conflicting values?
To be clear, they are providing advice on how we would vote in line with our guidelines. They can, of course, do that for multiple clients in line with their guidelines. Underlying each of our guidelines is a series of metrics and those metrics are measurable so they are then able to have a process to understand when we would be voting for or against. So there is no conflict. Robeco is just doing the heavy lifting in terms of advice. When there are things that are potentially a little more grey we are able to do a deep dive to better understand how we would vote.
You are the first pool to announce the appointment of an asset manager to help implement your ESG policies. Do you expect that other pools will follow a similar route?
I am aware of at least one other pool which is in the process of announcing their appointment (Brunel Pension Partnership has since hired Hermes for its engagement mandate) and I expect that the others wouldn’t be far behind. But pools wouldn’t necessarily have to appoint an asset manager, there are also specialist providers. There are frameworks for local government authorities to make sure that the appointments are in line with procurement rules for the public sector. Within that, local pools can appoint someone with voting and engagement services and that could be asset managers or other organisations. We went through an open procurement process. Following that, we appointed Robeco.
You stressed that it is important that the pools are not competing with each other, but will there be some form of collaboration?
They all have different needs and that has driven the way in which the pools have evolved. There are certain things in which we can learn from each other but ultimately we just have to get on and do what we need to do for our partner funds. There may be asset classes where we are able to work together more closely. Private markets is an obvious example, where closer collaboration might mean meeting investment needs more effectively.
Behind all of that is of course a huge amount of money that potentially gives local authorities quite a powerful voice if they were to coordinate their actions.
Absolutely.
