What have been your biggest challenges since becoming Brunel’s chief investment officer in January 2021?
The first was understanding the local government pension scheme world. Before joining Brunel, I had only seen it from the outside when such pension funds were my clients.
Local government pension schemes are interesting: we are an asset owner/asset manager hybrid. We are owned by our clients, who are also our stakeholders, which does not happen often. So I have 10 underlying members of varying persuasions and views.
One positive I have noticed is that Brunel’s clients are collaborative. They talk to each other and get on quite well, which makes collaboration easier. It is one of the reasons why we are 81% transitioned – so we are a long way down that journey because of that collaborative mindset.
How has your background in asset management benefited your current role?
Being a multi-asset portfolio manager – which I did for 20 years – teaches you things. You learn to delegate because you will never be the expert in the room. I know what it takes to run money, to build a multi-asset portfolio and how to think about liabilities. I have been there, seen it and understand what the issues are.
Here the emotional side of investing is crucial. Capital impairments can come from choosing the wrong stock or credit, but often making the wrong decision at the wrong time because the commercial pressure has been too great is another reason. “I know what you are going through,” is what I tell our managers in such a situation, which I believe helps.
Why did you join an asset owner?
There are a couple of reasons. When I was a partner at Sarasin & Partners in my late 20s/early 30s, I was running money for large charities. I then gravitated towards running money with a purpose, so there was that push.
I also wanted to go somewhere with an asset owner mentality, removing the commercial pressures and allowing me to focus on the parts of the job I love, which are managing teams and running money.
George Osborne created the pension scheme pools to invest in infrastructure and reduce costs. Have these been borne out from Brunel’s perspective?
On reducing costs, I can say 100% yes. We are up to £24m a year in gross savings. That was based on us being at a lower transition point at time of calculation – we are now more than 80% transitioned – so those savings will move upwards.
It is not rocket science. What I can do negotiating with £40bn [to invest] versus an individual £3bn is huge. You get a better fee bargain and the savings on economies of scale are significant.
On the infrastructure part, we have hired a former head of Big Society Capital to lead that team. So someone like myself: a hands-on investor who has come through the process. And importantly, we are a bigger team than the internal teams would have been historically.
And so, in our infrastructure portfolio, we are invested in greener bus services that make special provision for under-served/ low-income users – that’s our social priorities. And in our Secured Income portfolio, we are invested in harvesting rainwater for resource efficiency, and boosting biodiversity, at a biomass industrial plant – our climate and biodiversity priorities.
Brunel’s reputation has also been beneficial. People everywhere want to work with Brunel. So we do not just hand out a mandate, we try to make it as much of a partnership as we can.
Looking back, were these good measures that Osborne identified?
They were not enough. What they focused on were the tangibles. But cost is only one part of the equation. Value for money is the rest. There are other parts, such as producing the right performance outcomes and building strong relationships.
We do not just hand out a mandate, we try to make it as much of a partnership as we can.
Brunel has a long-term perspective on ESG. How would you sum up your ESG and net-zero approach, given some of the challenges on this front?
Responsible investment is integral to everything we do. One of our founders along with the previous chief executive and head of investment came from the Environment Agency. Responsible investment runs through Brunel like a stick of Brighton rock.
But we are also pragmatic. We have been clear that we will not make investments just to make us look better. We want to reduce the carbon intensity of our portfolios over time. We have been doing it since day dot, but we do not want to have a portfolio that has no carbon footprint in it.
We want to make a real world impact. There is no point changing our £40bn [exposed to net zero] and thinking that the job is done. It is not. You need to make difficult choices. You need to embrace the real economy. You need to find companies that are profitable while on the journey to decarbonisation. So supporting companies which have a credible plan through the transition is important.
Do not crowd into companies that avoid the issue. We invest in companies in the industrial space, which are carbon intensive but have a credible plan to decarbonise, while their products allow others to do the same. So it is about being pragmatic.
It is also not just looking at sustainable analytical scores. It is about combining all the major qualitative views and then speaking with the company.
There are, in my view, huge problems with data. It is backward looking; it does not tell you the full story. It shows you a snapshot in time and does not show you where a company is going. So you cannot rely on one dataset.
You have been allocating £8bn across private equity, debt, infrastructure and secured income mandates in the third cycle. What is the approach here?
The asset allocation is set by our clients and every two years in the private market sphere we have a new franchise. We have just gone into the third cycle, having been told how much [the members] want to commit and we scope the products together. So the members have been driving the allocation.
But as our credibility in the eyes of our clients has improved, our shaping of investment products has grown. That has been a slight evolution in the journey and now we are past core funds to a bespoke and local approach.
That seems an interesting adjustment for the pool model. Where has this come from?
A client’s desire to meet an objective. Some, for example, want investments with a local flavour. This happened in Cornwall. The local government scheme there highlighted the local investments they wanted to make and we looked at what was available.
Cornwall are paying for these investments in isolation, as our other clients are not bene ting from this programme. It went through an elective budgetary process and we agreed what was needed. Now that we have got this o the ground other local councils are paying attention.
Conversations are taking place with these councils: some about housing, some about renewables. We are using the template that is bespoke to Cornwall in these discussions because it can be utilised anywhere due to our internal expertise and leveraging that core expertise – and due to our existing relationships with asset managers.
This seems to dispel one criticism of pooling that impact investing would be difficult as funds cover too wide a geographic area.
When I first joined Brunel clients just wanted to invest in infrastructure, there wasn’t a local bias to it. We wrote to Boris [Johnson] and Lord Grimstone [the now former minister for investment] to say you want us to invest in local infrastructure, so please invite us to the table to get the ball rolling.
There are now those who want a local focus. We try to offer it all. That broadly means funds that are global, but where there is a want and desire to be local we can facilitate that. It has not been a big problem.
We are owned by our clients, who are also our stakeholders, which does not happen often.
How many funds do you have?
We have 17 listed market funds – which is quite a range. We are in the third cycle of private markets, which is private debt, private infrastructure, private equity, property and secured income. So it covers all the main bases.
But if you want something different, then we go through the normal process and present what that looks like, give our view and then create that product for the client.
Is there anything you cannot fulfil on the investment side for members?
We can’t create a passive range cheaper than what the big passive houses offer, of course – we facilitate their offering through an LGPS framework agreement. Actually, our big innovation on passive has really been in RI, as we and FTSE Russell together launched a series of Paris-aligned benchmarks, and we’ve since transitioned £4bn of client funds to track them.
Looking at the investment outlook, what are your biggest concerns?
There has been so much said about inflation, but this is not really an inflation issue. It is more that we are experiencing a changing paradigm. For the whole of my career and beyond we have operated in an environment of disinflationary trends.
This means that when most chief executives, politicians and central bankers were training they were taught to fight inflation. But they never had to do that. The whole institutional asset management, corporate, government and central banking landscape has not had to deal with inflation for a long time.
Some global trends of disinflation have disappeared or dissipated. We have had the introduction of China and emerging markets to the global workforce. That is not happening again. Same with Eastern Europe. The fall of the Berlin Wall and the rest of it integrated a lower cost and work base across Europe. The lion’s share of these trends have come to fruition.
We have had a paradigm shift in three months that otherwise would have taken three years. Inflation is good for markets, but it is a digestion issue. What’s happening now is not just about inflation; it is a re-setting of your base risk level.
In the short term, markets are in for more downward pressure. The silver lining is that this is pushing up yields. Suddenly, your pension liabilities look different. If you are inflation-linked, that will be an issue.
What are your future objectives?
The transition is not quite ‘job done’, but, as I mentioned, we are far down that road. What we are thinking about is organisational maturity: we have shifted from four at inception, to more than 60 staff.
We have created most, if not all, of the portfolios members want. So we are now asking them what they would like Brunel to look like.
We are having those conversations to find out what is next and where we go to hopefully reach a meeting of minds.
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