The assistant executive director of the Greater Manchester Pension Fund (GMPF) talks about the challenges of building back better, how to make an impact and why it is good to support local businesses but not local football teams.
Is there an investment opportunity for you among the build back better political rhetoric?
Build back better has been mentioned prominently by the US and UK governments. President Joe Biden’s Build Back Better Plan will see $2.2trn (£1.6trn) spent on health, social care, renewable energy and infrastructure. In the UK, it’s two policies: one for social care and health – building back better after Covid.
The other is government investment based on three pillars: infrastructure, skills and innovation. From an investment and pension fund perspective, there is clearly potential here, but it is too early to say as there is nothing investable at present. The hope, and expectation, is that this will change.
What about the levelling up agenda and the Northern Powerhouse idea: do they have any teeth from an investment perspective?
Again, these have great potential. It is important to remember that pension funds have particular investment needs. We need real returns, returns enhanced of inflation – while minimising volatility. Mature schemes need income, but open schemes, such as local government pension schemes, can harvest the illiquidity premium, so we can lock up our investment for a longer time.
This creates opportunities to invest alongside governments that support these policy ideas, but it needs to be appropriately rewarded. There is also a challenge in putting together the investment structures. There is potential for some of this government funding to be put into structures that would facilitate local government schemes alongside other pension investment.
The Thames Tideway super sewer is an example of a structure that facilitated pension fund investment while it was financed by the private sector, creating an early yield for a construction project by putting a levy on the water rates in London that was able to pay a yield to equity investors while the project was being constructed. This facilitated the pension fund investment in greenfield infrastructure by creating that early yield.
The problem for many pension funds with new infrastructure projects is the incoming cashflows are too far into the future, making them difficult for mature pension schemes to invest in. The North West Business Fund created a series of funds that were invested by private sector managers with public sector money. But again, the issue of why it was not as successful as they had hoped was the reluctance of private sector investors to go in alongside.
You are focused on local investments and are considered somewhat of a pioneer in this area since taking up your role in 2014. What do they bring to your portfolio?
The Greater Manchester Pension Fund has been the pioneer and my team have built on that history since 2014. The attractions and benefits are the positive local impact, which includes the development of the built environment, the creation of jobs, the promotion of social wellbeing and funding local infrastructure with a focus on climate change mitigation.
There is a real sense of pride for our pensioners and elected members in seeing the Greater Manchester Pension Fund logo as funder on construction sites around the area. We have always had twin aims on our local investments. At the portfolio level, they must deliver a return that is not detrimental to the pension fund’s long-term requirements.
On a deal basis, they must represent a fair risk-reward pay off. At present this is being broadly achieved. The economy of Greater Manchester provides some great investment opportunities. Examples include a £800m expansion of Manchester Airport, several residential developments, the Soap Works, which is now the headquarters for TalkTalk, a FTSE 250 company. There are not many of those outside of London.
Tell me more about your property investments?
We have a broadly diversified national portfolio in traditional property sectors. A key area of focus is affordable, with a small ‘a’, housing. We measure this by the rental values being 30% to 40% of key workers’ net salary in the public and private sectors. The UK has a much less developed institutional presence in the residential sector than other developed economies, and that provides an investment opportunity. The sector offers a profile of returns suitable to funds such as ours in terms of an increasing income and residual asset base that grows over time. We have allocated 1% to affordable housing, which equates to just under £300m. Overall, our property portfolio is worth in the region of £2bn, which is managed by several external managers and funds.
Infrastructure is a big investment theme. What projects are you involved in?
Greenfield projects have been challenging. We are invested in renewable energy projects and are looking for more. Our direct infrastructure investments are made through GLIL [a local government pension scheme-backed infrastructure investor] and we aim to have 5% of the fund under its management eventually. In terms of fully operational projects, pricing is extremely competitive to the point that it challenges the return requirements.
Are there enough infrastructure projects to invest in?
There are not given investor demand for the cashflows infrastructure can deliver. It is difficult to create greenfield investment propositions with a suitable risk-return cashflow profile for pension funds, especially for mature schemes. The big headline trophy projects do not necessarily have a positive internal rate of return without incorporating some reflection of the wider contribution to economic growth that they create. Having said that, there will be opportunities for governments and private investors to work together to create innovative financial structures to fund these projects.
Private equity is another interest of the Greater Manchester Pension Fund. What’s the attraction?
We have seen excellent risk-adjusted returns from our global private equity portfolio for many years. My focus is on local investments. We have helped the formation of regional private equity and private debt funds as part of our impact portfolio.
The injection of capital and institutional oversight by our investment managers are crucial to helping SMEs grow sustainably in our region, thus creating and protecting jobs. Examples here are the Foresight Group, which has invested in Mowgli Street Food and Clubhouse Golf.
What’s in your investment pipeline?
Our impact portfolio has several private debt and equity funds as well as some direct infrastructure, which will have a real positive impact on the environment. We are also looking to bring forward two key development sites in 2022: one in Chorlton worth £30m and the other a £50m project in Manchester. We have a £100m programme of impact investments in 2022.
Why have you signed up to a COP26 commitment?
We are a local authority pension fund and, therefore, have a wide circle of stakeholders. They have an inherent interest in this key challenge being addressed properly. The Greater Manchester Pension Fund has committed to a just transition and this guides our policies across all asset classes. I am privileged to look at an area where we can make a real positive impact, as evidenced by our pipeline. It is about changing the way we work and live going forward. It is about the built environment and infrastructure working towards net zero.
What is your investment approach to ESG?
ESG is a fundamental and integral part of our investments. It can mitigate risks, enhance returns and, crucially, is not a specialism separate from investment underwriting. Many aspects of our work over many years in impact investing, including having regard for the environmental and social impact of our buildings, are now becoming mainstream. We also insist that building constructors take on local apprentices and workers. That works on the social side and lowers the carbon footprint through travelling.
How do you see the inflationary outlook developing and how will it impact your investments?
I am concerned with the potential for higher inflation than we have seen in recent years. The Greater Manchester Pension Fund monitors all risks across its portfolios and takes a long-term view. My personal view is that there is a real risk it could exceed the consensus and be bumpy in its flight path, but I cannot predict the timing. Higher and more volatile inflation is a key risk. Contractual inflation linkage in private market assets, such as regulated utilities, social infrastructure and some elements of renewables, is becoming extremely expensive for investors. Whilst still providing a real yield it is arguable that there is inadequate compensation for risk underwritten in some cases. Implicit inflation linkage, such as the rent on affordable housing, has a lot more attraction from a pricing perspective, particularly outside of London and the southeast.
There has been a 40-year downward trend in gilt yields and a reversal could have significant market impact.
Paddy Dowdall
What other headwinds are you expecting?
How central banks react to inflation, and the implication of that, is a key unknown. There has been a 40-year downward trend in gilt yields and a reversal could have significant market impact. Within real assets, given the illiquidity, and the need to build them at this inflexion point, the real obsolescence risk of construction new assets is something I fear in property. When I mention Betamax risk at our investment committee, the younger members of the team look at me like I’m an alien.
What is your investment outlook for 2022?
We will stick to our plans to build diversified portfolios in line with our long-term strategies. I cannot and do not attempt to forecast markets over a 12-month horizon and view with extreme scepticism those who make such predictions. Like pundits predicting horse racing results, if they had any insight, they would profit from it rather than tell everyone. I generally try and anticipate risk and take a cautious view.
What have been the Greater Manchester Pension Fund’s greatest accomplishments?
The creation of GLIL and its growth is a source of enormous pride to myself and the team. In five years, it has grown from £500m and two pension fund investors to £2.5bn with a fully regulated structure. The concept has been validated by Nest selecting GLIL to be one of its infrastructure partners. In terms of an individual investment, a windfarm in Clyde with GLIL, which established GLIL as a direct player in infrastructure and opened up many opportunities, has delivered outstanding returns whilst meeting all of our ESG requirements.
My colleagues would say that my biggest achievement since 2014 is not being sacked for my annoying constant reminders about the success of Liverpool and the difficulties of Manchester United. I point out that Old Trafford is now on its fifth manager since I joined the Greater Manchester Pension Fund and I am hoping to make it 10.
