The £11.5bn West Midlands Pension Fund (WMPF) is a relatively young scheme as it continues to take employers under its umbrella. Mark Chaloner, assistant director of investment, tells Sebastian Cheek how this enables the fund to follow a heavily return-seeking investment strategy.
“Commodities is an area we exited from completely last year. We could not see they had a role to play; they were governance-heavy and expensive.”
Mark Chaloner
Can you give an overview of WMPF’s portfolio? The three main categories in which the fund invests are: quoted equities, fixed interest and alternatives. We have a returnseeking investment strategy so 90% of the fund is allocated to return-seeking asset classes and the balance is in gilts and cash which are stabilising assets. The strategy is return- seeking because we are not a mature fund and need to generate returns to meet our obligations. Nearly half the portfolio is allocated to quoted equities and a further 10% to private equity. In the fixed interest segment we have 10% in gilts and liquid assets and then a 9% allocation to returnseeking fixed interest: corporate bonds and emerging market debt. The balance of the fund is invested in alternatives comprising property, real assets such as infrastructure and absolute return funds.
How are investment decisions made? Our pensions committee is the body with the ultimate responsibility and it agrees the investment strategy. Then there is an investment sub-committee which looks at the portfolio in more detail and the implementation of strategy is delegated to staff at the fund, headed by the strategic director of pensions and then myself and my team, which is currently 15 strong. An investment advisory panel has recently been set up to support staff.
What assets do you manage in-house? We have been looking to do as much as we can internally and we see benefits in doing so. We have a successful passive management capability internally and are building up internal active equities management. In addition, our team select and conduct due diligence on unquoted funds before investing. We are looking to recruit selectively for the in-house team.
Has switching to a career average scheme under changes to the wider LGPS affected the investment strategy? Not really. A more important factor has been the cutbacks in local authorities and employee reductions. Over time the scheme will mature as more people retire which will affect the investment strategy over a number of years, so we have to pay more attention to liability matching in future.
Being a young fund, is there currently an LDI strategy in place? We don’t have one at the moment, but we do keep the situation under regular review. We did an asset and liability modelling (ALM) study last year and one thing we are conscious of is the desirability of putting in place employer-specific investment strategies over time. At present, there are approximately 500 employers under the WMPF umbrella and that number has mushroomed in recent years. That raises the question of whether we need to introduce investment strategies that are appropriate to employers, individually, as opposed to one generic strategy for all of them. It could be done based on different employer groups or by maturity or covenant strength, but it is early days. The other thing to mention is that we are putting into place a cashflow matching strategy for the fund’s orphan liabilities ( accounting for 3% of assets).
Comments