London’s CIV talks pooling progress

The coronavirus is an unprecedented test for the United Kingdom’s eight Local Government Pension Scheme asset pools. Set up over the course of the last five years to improve governance and reduce costs across the sector, in the last month the new asset pools have had to navigate unforseseen market turmoil and ensure the resilience of their young structures, processes and relationships.

The London Collective Investment Vehicle, the pooling manager for the pension assets of London’s 32 boroughs or councils has lost around 14-15 per cent off the value of its portfolio for the month following a slight recovery, and chief executive officer Mike O’Donnell says ensuring liquidity and diversification are priorities in the months ahead.

Amid the virus fallout, O’Donnell also remains focused on key areas in CIV’s development. Namely growing assets under management and offering a broader range of investment opportunities for CIV’s client pension funds. So far CIV has £18 billion assets under management across a variety of externally managed funds, but the organisation has the potential to manage £36 billion once client funds re-allocate all their assets to the pool’s management.

“We are half-way there,” says O’Donnell. “Our focus is on increasing our assets under management and ensuring we have the right funds in place for our clients.”

CIV’s part-way progress comes despite the organisation being the first pool out of the starting blocks. CIV was established on a voluntary basis before the government made pooling among its local authority pension funds statutory in 2015.

“I have always been a strong advocate of stronger collaboration. The idea of doing this 32 times over without any collaboration or pooling is just barking. It is for these reasons and the desire for greater collaboration that London local authorities established London CIV, originally on a voluntary basis,” says O’Donnell.

However, creating the right strategic requirements for its diverse 32 London borough clients has been challenging. Although all the funds share hefty allocations to global equity, a mix of passive and active allocations and a fixed income offering, they are also distinct organizations. While other pools typically manage assets for as few as two or up to 12 different pension funds, CIV’s 32 partners makes for a complex brief. “We are significantly over the average,” says O’Donnell.

It means identifying groups of boroughs with the same strategic requirements, and not trying to create a one size fits all. Client funds are also at different stages on their pooling journey. For example, one fund has transferred 80 per cent of its assets, yet another has only transferred its passive allocations, he says.

The right funds

Key to hastening the pooling process is offering the right funds. The London boroughs decide their own strategic asset allocations from a current offering of 14 different funds across equities, multi-assets, fixed income and infrastructure. But O’Donnell says CIV still doesn’t have the full set. One area under development is sustainable investment where CIV is playing “catch up” with O’Donnell referring to a “clear message” from client funds on their climate priorities. CIV is waiting FCA approval to launch an equity exclusion fund, adding to its existing sustainable equity fund based on engagement. Elsewhere the team is in the early stages of planning a renewables fund. “It will offer exposure to standard renewables, but will also consider other potential areas such as investment in battery technologies,” he says.

In an innovative development, it is also planning an impact fund. Working with sister pools the Local Pensions Partnership (LPP) and the London Pensions Fund Authority (LPFA), CIV is planning a new impact fund called the London Fund focused on housing and infrastructure in the capital.

It’s the first time CIV has worked with another pool in an initiative driven by client funds’ enthusiasm for local impact, says O’Donnell.

“Impact investment is probably still quite niche, but we have seen some interest from pension fund committees in focusing investment in local housing and infrastructure, while still maintaining returns.” Reflecting the responsible investment push, CIV has just added a head of responsible investment to its team.

Away from sustainable investment, O’Donnell is also planning an inflation fund to add diversification – all the more pressing in current markets. “Traditional diversification hasn’t worked well recently. In times like these, everything correlates,” he says.

CIV will also look at establishing private debt and property funds, and quicker ways for its client funds to integrate ESG via passive allocations. “Our job is to have the right funds ready for our partners as they become clearer about their longer-term intentions,” he says. However, he has no plans to fill the alternatives allocation although he notes it is a gap in CIV’s offering. “Investments in, for example, hedge funds are a relatively small element of the allocation of partner funds so building out the offering is not something we have in our immediate pipeline.”

No plans to in-house

Nor does he have any plans to bring investment in house. While other pools have set up internal teams and bought management in-house, O’Donnell says London’s borough pension funds have little history of in-house management because their assets under management have been too small at around £1-1.2 billion each. Outsourcing the whole portfolio and buying in expertise and research from external experts will remain the norm. “This is our inheritance,” he says.

It’s turned the focus on other ways to cut costs in line with one of the key rationale’s behind the pooling process. Saving money was relatively easy in the beginning, says O’Donnell. “Around five or six of our funds came on a lift and shift basis whereby CIV took on existing managers and mandates. When we brought them onto our platform, we worked with those managers to negotiate fee reductions.”

However, looking ahead he notes challenges around benchmarking progress on cost saving. “Once we move beyond the original lift and shift transfer of assets from partner funds to the pool, how we demonstrate the achievement of savings can be a challenging question because there is no direct benchmark in terms of fees the individual funds have previously paid. We are planning some further work this year to benchmark the London CIV cost base so that we can continue to show that we are delivering good value for money.”

All 14 funds are single manager funds. On top of this, CIV oversees two significant passive equity mandates run by BlackRock and LGIM in allocations that count towards CIV’s pooling targets. It’s an area CIV is keen to do more. “We are trying to get an extension from the FCA to give us greater ability to be more active in supporting the management of these funds and to offer alternative models to facilitate investments by our partner funds” he says.

More choice

Elsewhere he is keen to ensure partner funds have more of a role in choosing their asset managers, working more closely with them through the selection process. He says it will require CIV being open to new managers, as well as bringing partner funds on board with new investment ideas. “There will be a number of partner funds who are interested in a mandate, but we need to make sure they are ready to invest. It requires being open and transparent and involving partner funds throughout the process.”