- October 01, 2014
Keith Ambachtsheer’s lead article in the Fall 2014 edition of the Rotman International Journal of ... [more]
With total portfolio costs of only 15.3 basis points, the $43-billion United Nations Joint Staff Pension Fund is one of the most efficiently run pension funds in the world – not bad for a fund that has investments in 41 countries and 23 currencies. This year it embarked on an operations overhaul to bring even more efficiency to its investment management.
The fund claims to be the world’s most globally diversified pension fund: not only are its investments in 41 countries and 23 currencies, it serves 23 different member organisations scattered all over the globe.
This year it joined the twenty-first century with an investment-operations overhaul designed to bring further stability to its investment approach as markets continue to be volatile.
“Underneath the mess in markets, we built an infrastructure we think every fund should have. Basically we retired our fax machine,” says Suzanne Bishopric, director of investments at the United Nations Joint Staff Pension Fund (UNJSPF).
Of the world and in the world
The fund now has an integrated trade-order-management system, which is fully integrated with SWIFT and matched with an independent master record keeper
In the past the fund followed its own UN-accounting standards – not those standards adhered to throughout the world.
“We are now using accounting standards, followed throughout the world, that are robust. This has allowed us to do a lot of other good stuff like monitor brokers. We know within a minute if a trade has been executed. It gives us great monitoring power and the risks of mistakes are less.”
The fund is monitoring any distinction in transaction-execution costs in a quarterly report and Bishopric says it’s starting to pay off.
“We have learnt that you don’t have to reinvent the wheel. There are standardised products out there and if you take a modular approach to it then you don’t disrupt your operations. We started with the payments side, then our trade-order-management system, so we can keep brokers honest. The trade-matching and affirmation software keeps settlements safer and this is important for us because we’re global,” she says.
It isn’t a joke that the fund has “retired its fax machine”; until this digital technology was introduced it was still using faxed orders.
“We would send a fax to Brazil and get a reply the next day. Now we are as close to the state of the art as any fund; we’ve leapfrogged some intermediate technology,” she says. “We went from a green field to state of the art. But there is an advantage to being a latecomer: we can see what is tried and true and what the industry standards are.”
Bishopric says the fund’s 58 staff recognised they needed these standards to improve their performance and put in a lot of effort to make it happen.
About 90 per cent of the fund’s assets are managed in-house, except for private equity and real estate.
It recently engaged CEM Benchmarking to do a cost-benchmarking study, which revealed its costs were “off the charts on the low side”, according to Bishopric.
The total investment costs of managing the portfolio were 15.7 basis points, which is an outlier in terms of global funds, it is “dangerously low”, she says.
The fund’s global peers typically operate within the range of 40 to 80 basis points.
Compared with other funds the UNJSPF saves money because of its internal trading and it also has a very low allocation to alternatives, currently less than 1 per cent, and similarly less than 5 per cent to real estate.
At the end of March 2012, the fund’s asset allocation was 60.7 per cent equities, 28.8 per cent bonds, 4.5 per cent real estate, 5.2 per cent short-term investments and 0.8 per cent alternatives.
However, there is a plan to increase the alternatives allocation, which Bishopric says is being done methodically and judiciously, adding about 1 per cent per year.
The fund’s biggest alternative investment is with the World Bank Group’s Intenational Finance Corporation’s African, Latin American and Caribbean Fund (IFC ALAC), which is a private equity investment.
“The philosophy is the investment has to resonate with our organisation,” she says. “We have a number of restrictions, such as tobacco and defence, reflecting the ethics of the UN.”
One reason the fund invested with the IFC fund is that it is managed consistently with principles of responsible investment (PRI).
“We can then learn private equity their way first, through a beneficial approach, before going to the private markets.”
The World Bank green bonds are another investment and an example of the fund investing according to PRI, she says. There are also other screens in their equity investments, such as worker safety.
The fund recently tested its new system in a disaster-recovery test, during which everyone in the investments team worked from home. Bishopric was in Montreal at the time and the deputy director for risk, Ajit Singh, was in Geneva.
“We managed to do our trades,” she says. “It was extremely beneficial and I highly recommend everyone do that. As Treasurer of the UN, I lived through 9/11 and having systems helped us enormously then.”
Operating reforms will save costs, she says but insists the point of pension investment management is to manage returns, not costs, the net return is the important place to focus
Having said that the fund did have a negative return last year partly due to a huge weight in Europe. It has investments in 41 countries, with North America dominating, followed by about 25 per cent of assets in Europe.
“There is uncertainty to what will happen in the eurozone,” she says.
“A set of irrevocable exchange rates poses some serious constraints. If you have an irrevocable exchange rate then greater flexibility will be required from other economic factors, such as labour or interest rates. There is a single currency but not the same creditworthiness.”
UNJSPF has liabilities in Europe, so “we do need to have some exposure there,” she says.
At the moment all the assets are managed in New York, but Bishopric says budgets not withstanding, it would be ideal to have an office in a different time zone.
However, she acknowledges that satellite offices are a risk and need to be well staffed, and have the same risk management and oversight as any office.
“You can’t start a second office on the cheap,” she says. “Operating infrastructure is a missing thing in fast-growing funds.”
UNJSPF also implemented RiskMetrics this year and now every portfolio manager has access to the risk parameters of portfolios.
“We analyse the portfolio risk at least weekly. Because we manage money in-house, the fund can benefit from delving deeper into the components of risk.
“We can look at every stock and it’s attribution to risk,” she says. “We can find outliers in every portfolio and remove them. We did that in the first quarter when we wanted to dial down risk.”
Bishopric is slightly optimistic: she says the value-oriented managers are seeing great valuations not seen since 2008.