Total portfolio management pays off at LPPI

The £23.1 billion Local Pensions Partnership Investments is amongst the oldest of the eight UK pension pools and differs to its peers in two important ways, one philosophical and one structural.

Back in 2014 – before then-Chancellor of the Exchequer, George Osborne, advocated for the pooling of the 89 local government UK pension funds – Lancashire County Council and the London Pensions Fund Authority began discussions having self-identified the benefits of pooling and owning in-house asset management capability. In 2016 LPPI was formed.

“This is a coalition of the willing,” says Chris Rule, chief executive of the fund since 2020 who joined as the inaugural CIO in 2016.

“It was designed by these two funds from the ground up, they wanted to do it. It’s why we are seeing the cost savings at greater magnitude than some of our peers and why we have been able to rapidly consolidate assets.”

The philosophical buy-in and self-direction was important but according to Rule the real benefit of pooling came from the governance structure, different to other pools, where 100 per cent of the assets were pooled.

“If you are sub-divided then you don’t really create scale. We have a curated menu of options to fulfil individual strategic asset allocations so from 2016, 100 per cent of assets were pooled. We were fully delegated to manage the assets as a fiduciary from the beginning, similar an outsourced CIO.”

“It has meant the clients have benefited from the full-time dedicated resources in LPPI across their portfolio since day one,” he says.

Managing the total portfolio

This full delegation has led to cost savings and access to different types of investments, but most importantly, according to Rule, the management of the total portfolio.

“Throughout my career I have worked in various investment houses and one of the short-comings of a typical asset owner is they have small portions allocated to different agents and no-one knows what the other is doing. You can get duplication and over diversification that way,” Rule, whose career included SEB and Old Mutual, says.

“Because we can manage the whole portfolio we don’t have to have the hyper diversification in a typical asset owner portfolio, and we can take skews in the portfolio.”

The process is similar to other large institutional investors that use a total portfolio approach, including New Zealand Super, with a reference portfolio and a policy portfolio and active decisions made relative to that.

“We are not trying to be too cute and tactical,” Rule says.

“The total portfolio is not about tactical overlays but about how we can set the mandates for ourselves and the managers we work with.”

The total portfolio view allows CIO Richard Tomlinson and his team to be more flexible in mandate construction and Rule says the fund has fewer concentration limits than if it didn’t have that total portfolio look through.

“We would rather work with managers and have high-conviction mandates uniformly than have managers with a largely diversified mandate,” he says.

“It also gives the chance to analyse where there are pockets of concentrated risks.”

Top-down total portfolio concerns include geopolitical risk, ESG and responsible investment risks and how they may manifest, inflation, and how investable China is.

Internal manager performance

At the total portfolio level the fund measures the ability to outperform the policy portfolio and according to Rule it has outperformed on all time frames.

“When we do peer analysis we look good relatively and are top of the pile over five years. When we look at the individual asset classes we can see alpha consistently across those portfolios,” he says.

LPPI has seven separate funds: global equities, fixed income, diversifying strategies, infrastructure, credit, private equity and real estate.

Global equities is the largest allocation at around 43 per cent of the pooled assets and is managed with a mix of internal and external management.

The internal global equities team at LPPI in particular is an outperformer and since inception internal global equities has returned 14.2 per cent versus the 11 per cent benchmark.

The internal team, which manages around half of the equity portfolio, features at the top of the global equities roster which also includes external mandates with Magellan, First Eagle, Wellington and Baron, with Bailie Gifford also appointed in December 2022. Its three year performance is 15.4 per cent.

“We aim to outperform by 200 bps a year and we are doing about 300 bps,” Rule says.

“We are in the top decile of managers in that space, and over five years we are even stronger.”

The investment and risk team numbers about half of a total 132 employees and while there are no immediate plans to hire or build new teams, over the medium term it is likely the platform will bring more inhouse. Most of what it currently does is through external managers.

“Part of our business planning to see where to take the business next and engage with clients to see where their asset allocation might shift to,” he says, adding the internal team has explored incubating some equity ideas with allocations of £1 million or less.

“One of the things we want to do is to give analysts career progression, and we will give them a small slice of the portfolio and let them have some portfolio management discretion. Our current equity internal team started in 2014 with about £40 million and now manages more than £5 billion.”

Impact on costs

In the year to March 2022, LPPI saved £39.1 million in costs, up from £28.2 million the year before, and bringing the total costs saved since inception to £113 million. The increased cost savings has resulted in a revised total cost savings by 2035 of £500 million, up from the initial estimate of £468 million.

The savings have come through pooling, and a focus on direct investments and internally-managed portfolios.

“A big chunk of the savings is internal management,” Rule says. For example, investing in infrastructure has contributed almost a third of our total cost savings.

“A typical infrastructure fund is 150 bps or more once you have taken into account management fees and carry. We can invest in private infrastructure for around 30bps all in,” Rule says.

“That is a very significant saving, but requires us to have the skills to do that. We have always said we should only directly invest where we have the skills to do that and an interest in investing there. There is no point doing it for a short-term holding, or where we can save a few basis points of fees and lose more in poor performance.”

The other area where LPPI has been quite thoughtful, and where Rule’s expertise has come to the fore, is negotiating third-party mandates in fees and structure.

For example the bulk of the real estate investing is direct with an external partner who does much of the sourcing and makes management decisions, but LPPI has the final say.
In infrastructure LPPI is also the designated alternative investment fund manager for GLIL Infrastructure.

The future power of pooling

As Rule and his team look to the future the focus is on collaboration.

“The model we have built is scalable and attractive,” he says.

“We need to take a step back and look at the characteristics of the model we have and how that fits with others.”

In 2020 LPPI alongside LCIV and LPFA, with combined £57 billion in assets under management, launched The London Fund, a London-focused investment fund investing in Greater London in affordable housing, community regeneration projects and infrastructure including digital infrastructure and clean energy.

“Collaboration across pools, like we did for the London Fund, will be the focus for the next 12 months,” Rule says.

“We will continue to have conversations about collaboration more broadly and the benefits of creating greater scale within the larger network. And we will look at the risks associated with bringing in more funds into the pool.”