Why did the fund increase its emerging market equity allocation last year?
The increase was made during the period of market weakness towards the end of 2013. The reason was to take advantage of the longer term growth potential and relatively attractive valuation. We had a tendering process and appointed three external managers to manage the allocations.
Why did you withdraw your £200m hedge fund allocation?
We had an asset allocation review last year and concluded hedge funds did not have an obvious role to play because we believe we can achieve diversification more effectively through other means. In common with most other pension funds, high fees were a consideration and hedge funds are a high governance area for a small allocation; £200m is a big sum of money but it is a small allocation in the context of the fund.
Where did you move the money?
It is a phased exit so we do not have all the money in at the moment. We are not allocating the funds to any one asset class but looking to invest across existing asset classes in areas which will naturally diversify our portfolio. We feel we can then achieve the diversification we need.
Do fees influence your thinking elsewhere in the portfolio?
Yes. We are certainly conscious of the need to secure value for money and control costs and so we have been taking steps to reduce fees across the piece. This is one of the reasons we are doing more in-house.
How else has the fund changed recently?
As far as overall asset allocation is concerned, we have not made any major changes. We have been doing some portfolio streamlining with a view to: a) securing better value for money; and b) ensuring we have tighter governance and oversight of our portfolio, and we hope that will bear fruit over time. Commodities is the other area we exited from completely last year. We could not see they had a role to play; they were governance-heavy and expensive.
Where does WMPF stand on the active versus passive debate within the LGPS?
We think there is a role for both active and passive. As a fund we have a substantial allocation to passive, especially quoted equities, but we also think targeted active in quoted equities and in other liquid asset classes has a role to play. We don’t think it would be right to compel local authority pension funds to invest passively.
Are you supportive of collective investment vehicles (CIVs)?
It is incumbent on all public sector pension funds to find ways to control costs and work collaboratively. We are open to collaboration with other LGPS funds but we don’t have plans to invest in any CIVs. We are aware other LGPS funds are planning to do so and we can see why it makes sense for them.
But being a large fund, do you think it makes sense to co-invest with other funds?
We are certainly interested in co-investment opportunities but will be selective. We are mindful of the risks however, and aware of the need to make sure we can properly analyse and oversee any such investments. One obvious risk is concentration risk; with co-investments you can deploy a fairly large amount of capital, larger than you would normally do, into a single or a small number of investments which in aggregate amount to a large sum and if they don’t work out then the performance implications could be quite significant. You have to be mindful of concentration risk and having a suitable investment selection and monitoring process.
Talking of collaboration, why did you sign up to the Pensions Infrastructure Platform (PIP)?
It is a collaborative venture between large pension funds, both public sector and corporate, to invest both effectively and cost-effectively in infrastructure. That remains the rationale for setting it up and that remains our view of the benefit of investing through PIP; we believe it is the right way for a pension fund to invest in this area.
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