Investor Profile

Buoyant mood at West Yorkshire fund

The richest seam in the UK’s pension landscape traces the M62 corridor, a motorway that threads east to west across northern England beginning in Liverpool and taking in Manchester, Bradford and Leeds.

These cities are home to the biggest local authority pension schemes in England and custodians to a vast cluster of wealth.

“Merseyside, Tameside, West Yorkshire there is a huge amount of money in a very small space here,” enthuses Rodney Barton, director of the Bradford-based £9.9 billion ($15 billion) West Yorkshire Pension Fund which he joined four years ago from nearby schemes East Riding, and before that Merseyside.

Despite these funds proximity, each is guided by its own particular ethos. At West Yorkshire the mantra has been a bold equity strategy that it refused to pare back in the wake of the financial crisis. Now the fund is reaping the benefits of the equity lift off, returning 14 per cent in the year to March 2013.

About 67 per cent of West Yorkshire’s assets are portioned to equity in a portfolio split between the UK (36 per cent) the US and Europe (8 per cent each) Japan (4 per cent) and Asian and emerging markets (12 per cent) with the UK allocation invested only in companies with a global reach.

“We choose big companies that are not dependent on UK income,” says Barton. As the scheme taps global markets through UK equities, so it taps emerging markets – an allocation it plans to grow – through companies deriving their profits from growth in developing markets but listed elsewhere.

“We gain exposure to China through Hong Kong or Taiwan,” says Barton. “One of our primary concerns is corporate governance so we want exposure this way because we can be more certain of the accuracy of the annual report.”

Although the scheme will use unit trusts or exchange traded funds in smaller markets, the bulk of the equity portfolio is actively managed in-house.

“In markets of any size we own the stocks directly,” he says. Even the US allocation, where some pension funds have abandoned any attempt to outperform the market, is actively managed.

“Compared to other markets the US is more difficult,” he admits. “Recently we have come in below the index but not enough to worry us; long-term we are still ahead of the game.”


Equity downturn

Barton expects the equity boom to tail off, predicting total equity returns of 7 per cent over the long run.

“Years like this are nice but they won’t continue,” he says. But there is no plan to pare down the scheme’s equity allocation just yet.

An actuarial evaluation, out in nine months, will cast more light on the fund’s liability profile but until then, backed by rosy fundamentals, it is full steam ahead.

Of West Yorkshire’s 245,000 members, 91,000 still actively contribute to the fund and 81,000 have deferred benefits; the fact the scheme is 93 per cent funded, adds to the buoyant mood. It’s a small deficit that Barton attributes to a decision six years ago to ask members to contribute more.

“We were fairly aggressive in increasing our contribution rates back in 2007,” he says.

The scheme has also worked hard to cut costs, topping the list of the UK’s 89 local authority schemes in a recent report by the Local Government Pension Scheme.

“Our scheme costs each of our members just £28 ($43) a year; we have a very tight grip on out costs. One of the ways we do this is in-house management. It’s cheaper to do it yourself.”


Allocation changes

After an eight year hiatus during which the fund hasn’t allocated any fresh money to property, the scheme is now looking at boosting its 3 per cent allocation.

Assets here are currently portioned between the UK (two thirds) and Europe (one third). Similarly, West Yorkshire’s unquoted infrastructure allocation is minimal, perhaps 1 per cent, with most exposure channelled through the equity portfolio via investments in utilities like water companies, where it has “positions with big dividend payers.”

Unquoted PFI infrastructure funds sit in the 5 per cent private equity allocation.  “The original PFI contracts had a much higher risk and reward and they now provide long-term index-linked cash flow and are very attractive assets for pension funds.”

The scheme hasn’t joined the government’s Pension Infrastructure Platform partly because “it wasn’t approached in the first wave and discounted the idea” but also because of the stop-start nature of the PIP’s progress to date as it struggles to find a balance between the priorities of its founder members, and the government’s desire for infrastructure investment.

Elsewhere, a 6 per cent allocation to hedge funds stood West Yorkshire in good stead during the financial crisis. Since then the allocation has disappointed however, and been shaved to 3 per cent.

“After 2007 I don’t think hedge funds saw the recovery coming. They got left behind and once you are left behind it is very difficult to catch up.”

In contrast, private equity has faired better. “Our experience with private equity has been pretty good; it’s delivered long-term 11-12 per cent returns. The bad periods have been a function of the equity market and an inability to sell anything, but pleasingly we had lots of realisations in 2011.” West Yorkshire’s most consistent private equity returns have come from small and medium-sized funds. All allocations to private equity, property and infrastructure are managed externally.

West Yorkshire has an 18 per cent allocation to bonds, a quarter of which is in corporate bonds and three quarters in government and index-linked bonds in the UK and overseas.

“We recently increased our corporate bond exposure because they have a shorter maturity and we have grown nervous around government bonds.” Most corporate bond exposure is in UK and US however. “We come across fewer opportunities at the right price to invest in European corporate bonds; companies there are much close to their banks,” he says.

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