But you don’t have an explicit liability driven investment strategy?
I would argue we match over the long term, so having a heavier weight in risk assets will give growth over time. Clearly that will be volatile if another 2008/9 comes along and equities are down 30%, but we are now six years on and most markets are quite a bit higher than back then. We think we can live with that volatility because we have a strong covenant being a local authority pension fund and the majority of our employers are statutory bodies with taxraising powers. So in a sense we are not matched on a month-by-month, year-byyear basis, but our expectation is over the next 16 years our deficit will be recovered as assets continue to grow and liabilities don’t grow so quickly.
So you’re not concerned about another market crash?
It is a concern and we have to regard volatility because the scheme is maturing. Six years ago we were cashflow positive and more able to ride out those situations, but we have matured more quickly as austerity hit the public sector and jobs have been cut. We can’t be blasé and we need to be more aware of downside risk which is why we are more cautious at the moment in terms of our position. In fact, we are more defensively positioned than the majority of local authority funds, so for all my apparent bullishness we have been more cautious than other funds.
Have you considered collaboration with other funds?
We collaborate informally with other funds so we do share information. It makes sense to collaborate and look to reduce costs where we can, but just putting two funds together does not improve the funding or the deficit position. There are clearly benefits and I’m sure it is something we will be involved with in future. Partly, we have waited to see the outcome of the consultation on efficiency in the LGPS.
Where do you stand on the active and passive debate going on within the LGPS?
We run some money in-house so it does have implications and we are interested to see how the consultation comes out. I certainly don’t agree with a wholesale move to passive but it does have a place in our portfolio. One example is index-linked gilts, because there aren’t a great number of index-linked gilt instruments available, so we think passive is a cheap and efficient way of investing there.
You have a minimum variance allocation. Do you intend to do more in this area?
We have more than one mandate in each region and it complements the existing mandates there. When we looked at it we did not just look at it in isolation we looked at it against the two mandates; one is an inhouse portfolio and the other external. It correlated well so that ticked some boxes. More importantly in terms of minimum variance when markets fall it tends to hold up pretty well. Obviously when markets rally it tends to lag but capital preservation is more attractive to me than shooting the lights out and it is all part of a mix to add value over the cycle. We have been waiting for the outcome of the consultation before we go out to retender some of our other mandates, so it could be when we retender we look to introduce minimum variance or one of the other smart beta styles. However, we have to realise that while smart beta is a buzzword it can mean different things to different managers. I think there is something to be said for blending strategies so in principle academically, there is something there for investors, but we will see where that takes us – we have nothing immediately in the pipeline.
What do you currently manage in-house?
We manage some UK and some European equities and then we would say we manage alternatives in house, that is to say we select funds to give private equity, hedge fund and infrastructure exposure and monitor those mandates. Using hedge funds as an example, we will invest with Brevan Howard or Winton Capital, but mainly in single strategy funds rather than funds of hedge funds.
Do you plan on moving more in-house?
I would like to. Again, it is waiting for the consultation and having the right people to do it, which is easier in some locations than others, and there are some constraints as a local government pension fund in terms of pay scales. The private sector pays more, so the danger is better people leave.
Do you invest in other inflation-linked assets?
We are building out the infrastructure through funds and it is equity rather than debt, although we have done a couple of funds where it is a mixture of both. It involves a bit of development too, which we think is well worth doing. There is quite a big debate on whether you buy operating assets to take away the development risk, but some of the smaller scale projects in the UK are pretty low risk in terms of construction risk and we have made some investments in projects we think where there is a proven technology and team and the returns are looking very pleasing for us. It has been worth taking on that additional development risk to achieve those returns.
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