If Tony Broccardo, head of Oak Pensions Asset Management, the investment arm of the £23-billion ($35.6-billion) pension fund for employees of London-headquartered bank, Barclays, wasn’t a fund manager he would have been an architect. But Broccardo has applied similar skills of stress testing, planning and making something structurally secure to the return-seeking fund, one of the United Kingdom’s largest and most sophisticated schemes. It posted a per annum return of 11 per cent for the three years to December 2012 and Broccardo, who started out as an investment analyst and strategist at brokerage houses before joining the scheme as its inaugural chief investment officer in 2008 from F&C Investments, attributes success in today’s difficult climate to a strategy combining active management, diversification and flexibility. “We have proved the concept of greater diversification and active management,” he enthuses. “Over the last three years, which includes the crisis period, we added $1.08 billion to the fund. Over five years we have added $2.3 billion over and above what we’d have made with an equivalent passive bond and equity portfolio.”
In the belly of OPAM
The fund, which manages assets for around 250,000 current and former Barclays employees, was restructured in 2010 when the bank set up its own asset manager, Oak Pensions Asset Management (OPAM). Like other big UK schemes such as the Universities Superannuation Scheme, the closed coal-industry pension schemes and retail giant Tesco, Barclays took back control of strategy from external advisors in a decision Broccardo says allowed both flexibility and “real-time investment management solutions”. The OPAM team is split three ways comprising manager selection – trustees handled all fund-manager oversight before OPAM – an implementation team and an asset allocation team. Most members of the 14-stong internal team have hedge fund backgrounds and, excluding private equity, the fund uses 40-odd managers. Managers responsible for at least 5 per cent of the total assets under management include BlackRock, Aberdeen Property Investors, Russell Investment Group and Towers Watson. The use of an overlay allows “huge flexibility” in selecting the best active managers and Project Smart, an internal initiative applied to all active mandates, measures strategies using smart benchmarks and indices to see how managers are doing. “We apply SMART to all allocations. It is very much the case that the trustees want Oak to focus on strategy; they allow us to use more or less managers as the opportunities arise.”
Within its 20-per-cent equity allocation, OPAM has steadily increased its risk levels, pushing active management of mandates and “much higher exposure” to emerging markets – three times more than what it was in 2010. Broccardo has also introduced tilts to its equity portfolio, shifting allocations to take advantage of specific pockets of outperformance. “Last year we increased our exposure to Europe out of US equities. We’ve also increased our exposure to global companies and the tilts in place here have done very well,” he says, adding that OPAM will continue with a strategy to gradually pare down its equity allocation in favour of alternatives.
The fund currently has a 12-per-cent allocation to private markets comprising property, infrastructure and private equity. Private equity investment is global and includes stakes in technology, clean energy and medical start-ups. “Diversification has paid off; we’ve gained an illiquidity premium investing in private equity over public markets,” he says. Infrastructure investment lies across “different industries” but the fund has only recently made its first foray into the UK in a strategy to tap both growth and hedge against inflation risk. It’s a trend increasingly evident among other UK schemes, pouncing on domestic infrastructure assets as banks pull back from the sector because of new capital rules. In its second private placement to a UK water company, the Universities Superannaution Scheme has just structured a $147-million loan for London water authority, Affinity. “We’re looking to benefit from increases in the value of the underlying investment, but also get exposure to UK inflation and rate rises. Our liabilities are in the UK so we do have a preference for UK infrastructure,” says Broccardo.
OPAM allocates 35 per cent of its portfolio to liability-driven investments and 20 per cent to credit. Here the approach is “wholly proactive” fashioned to both lock down liabilities but be flexible and creative too. The focus, explains Broccardo, is on rebalancing the mix of exposures and replacing one strategy with another – tilts are applied here too. For example, in a bid to tap medium-term returns further down the credit spectrum the allocation is titled to high yielding assets in the credit market like issuers in countries such as Spain or Italy. It’s a risk appetite apparent again in the 12 per cent allocation to diversified assets. Global tactical asset allocation mandates to exploit short-term market anomalies, macro strategies seeking profit from economic uncertainty and commodity and niche currency exposure all come under this umbrella. “The majority of these strategies are implemented by hedge funds, specifically focusing on strategies less correlated with equity or credit risk,” says Broccardo.
One fund, one strategy
Looking ahead, OPAM will continue to “modestly increase risk.” Positively, Broccardo believes there is less tail risk thanks to recent policy action in the US, although “adverse outcomes could still have an impact on markets”. A fall in corporate profit margins may still negatively affect equity portfolios and rising interest rates impacting long-dated debt is the other concern. “History suggests that if the market is concerned about inflation, the sell-off will be abrupt.” He says OPAM’s focus is on spare capacity within larger economies with so-called output gaps. The idea to “assess where there is still headroom for growth before inflation expectations kick in,” he says.
OPAM’s success begs the question – will they run money for other pension schemes? It’s a model developed by Hermes, set up as inhouse manager for telecoms operator BT’s pension scheme but now with mandates from other pension schemes too. But Broccardo won’t be drawn: “We just think about how to improve the outcome of one fund and one strategy,” he says. No, his eye is firmly on how big the Barclays fund, up from $27.8 billion in 2007, could one day become. “We can look back over a number of years and see how we have moved the dial. We are now big enough to move the dial.”