LGPS Central, one of the United Kingdom’s eight new mega funds, will cut the number of asset managers in its £45 billion portfolio from 250 today to around 50 over the next 10 years.
LGPS Central Limited inherited a long list of managers via its nine member funds which ran their own portfolios prior to the government’s decision to create fewer, bigger pension funds for it local employees. According to LGPS Central Limited CIO, Jason Fletcher the list comprises “some good and some not so good relationships. Looking at consolidating the number of managers it uses is consistent with the fund’s priorities which includes cutting investment costs while maintaining returns. And the process is already underway.
In one global equity allocation Central recently chose just three managers (Schroders, Harris Associates and Union Investment) to run a £2 billion global active equity fund. In emerging markets, it has also replaced member funds’ multiple relationships with three managers (LGM Investments, a subsidiary of BMO Global Asset Management, UBS Asset Management and Vontobel Asset Management) and in March it selected Fidelity and Neuberger Berman from more than 70 fund managers bidding to run a global investment grade corporate bond fund.
It’s a shrinkage that will speed up when Central turns its focus on private markets, says Fletcher who adds that liquid assets are typically managed in Authorised Contractual Schemes (ACSs) structures and illiquids in LP structures.
“Change is always challenging, and we need to work with our partner funds which have good relationships with their asset managers to prove the cost and return benefits of switching to fewer managers. It’s not an easy process because there are multiple stakeholders to deal with,” he says.
So far around £20 billion of the member funds’ total of £45 billion is under the stewardship of LGPS Central Limited; a handful of niche portfolios will remain outside the pool including illiquid legacy assets and partner funds’ local investments, he says.
The Cost Transparency Initiative
The Cost Transparency Initiative and its drive to introduce new templates which standardise costs, and charges information for institutional investors, has become an important tool in Fletcher’s toolbox for accurately analysing investment costs.
Most importantly it informs his ability to recommend new funds to the pool on a like-for-like basis, he says.
“The Cost Transparency Initiative has become critical for making investment decisions on the basis of “true” costs. This then better informs investors whether the manager can outperform after costs,” he says.
The fund is targeting £250 million in cost savings by 2034, but needs to balance the need to cut costs with maintaining returns. Asset manager fees also pale in comparison to the steep costs Central has incurred in the pooling process like appointing business partners to provide back oﬃce and middle oﬃce functions, audit services and full regulatory compliance.
“Setting up a Financial Conduct Authority-regulated single entity has associated costs, but we are fully confident that our investment savings will cover that expense and we will generate better net returns and more robust governance.”
Another factor impacting the size of the external manager roster is Fletcher’s ambition to run a high portion of Central’s total AUM in house.
“We are very hopeful that our partner funds will look to more in-house and direct investments over time where we believe we can really add more value,” he says.
That said, he recognises the challenge of finding in-house “investment professionals that are better than those that are out there.” Nor is he expecting to do “everything in-house.”
When the fund was formed 18 months ago, 15 staff originally transferred from the partner funds to LGPS Central’s investment office. That number has now grown to around 50 through external hires in an ongoing recruitment drive to build out the investment team and the back office.
“We aim to have 70 employees across LGPS Central Limtied by the end of the year,” says Fletcher, formerly CIO of the £15 billion West Midlands Pension Fund. He is keen nurturing internal talent over external recruitment in the longer-term.
“As soon as possible we want to develop talent from within, and one of our key objectives is also building an investment capability in the Midlands. It’s easier finding talent at the trainee level and here we will look to the talent of the students coming out of local colleges.”
The pooling process will also increase access to new asset classes for some of the partner funds. Partner funds are still responsible for setting their own asset allocation which is typically split between 60:20:20 to growth, stabilising and income generating assets respectively.
Boosted, and in some cases new, allocations will include infrastructure and private equity but also strategies offering downside protection like LDI, says Fletcher.
Central launched a private equity platform earlier this year through which five of the nine member funds have already made two co-investments and some fund investments.
“Those partner funds that are not invested in private equity are starting to consider it. We are looking to make investing here more flexible and lower cost using our economies of scale and again ensuring that cost cutting is not to the detriment of expected returns. We have already made considerable cost savings through a combination of negotiating lower fees and co-investing. It’s also secured better access to the best investment ideas and managers.”