Fund update

19 Apr 2016 Fund update

The fund pipeline

The CIV has now launched its second global active equity fund. These two mandates are managed by Allianz Global Investors and Baillie Gifford, and are open to new investors. (Baillie Gifford’s Diversified Growth Fund is also on the CIV, but is closed to new investors). These funds, together with the passive (index) funds managed by Blackrock and Legal & General Investment Management, complete the line-up for Phase I of the launch.

We are excited to announce that we have provisionally agreed terms to bring on investment managers in the active global equity and multi-asset spaces, thus increasing choice for the boroughs in these investment areas. These managers were selected as part of Phase II of the fund selection and onboarding process. This phase, now in full swing, revisits fund managers who are eligible for inclusion by dint of the “CQC” criteria: that is, Commonality (the number of London Boroughs (LBs) currently invested), the Quantum of Assets Under Management (in order to gain from economies of scale), and Conviction (the relevant LBs wish to remain invested). Further, the manager must offer commercially attractive terms, and material capacity for new investors is also highly desirable.

In the multi-asset space, we have agreed terms to onboard the CF Ruffer Absolute Return Fund, the Pyrford Global Total Return Fund. We’re also in discussions with Newton to potentially bring on their Real Return and active global equity funds. All told, the line-up with the new additions will bring the total AUM of the CIV to approximately £8 billion (at current market levels), and lead to annualised cost savings of almost £4 million. (NB this figure is based solely on Annual Management Costs, and does not take into account other cost savings such as performance fees and custody. We will be able to calculate actual performance fee savings once the relevant funds launch).

Talks with other fund managers are ongoing, and we will provide updates as soon as we are able.

Global Active Equity

The CIV is shortly to launch a broad search for Active Global Equities funds. This space (total Global Equity, including passive funds) remains the largest single asset allocation within London’s local authority pension funds. LB Pension officers will be receiving a short questionnaire, which will enable us to establish in greater granularity the degree of commonality, and to determine the extent to which LBs wish to alter their allocations either to the asset class, or within the asset class.

The approach is one of “core and satellite” (i.e. large, traditional funds plus boutique managers), in order to give you sufficient choice in this asset class. We will offer a line-up of managers who have different styles and approaches, and we are seeking products which have a distinct philosophy and approach, which has been consistently well executed. Company structure is a key consideration in order to ensure that interests are aligned with investors. This will also include an active global ESG fund. Finally, we will utilise systems to allow you to run correlation studies, to ensure that they are able to procure the optimal mix given the differing circumstances and risk budget of each pension fund. The search will be formally under way shortly.

Fixed Income and “The Cashflow Challenge”

As previously discussed, the 2016 triennial valuation is likely to highlight a greater need for cashflow-generating assets, according to feedback we have had from you thus far. The policies of Central Banks, as well as the controversial influence of Basel III and Solvency II regulations, have rendered many traditional products no longer suitable or able to generate the cashflow returns which you are likely to require. Therefore, we are casting the net wide in order to be able to offer a range of possible solutions which LBs can blend to create an optimal bespoke solution.

We are thinking as broadly as possible and will offer non-traditional approaches and products, as well as conventional funds. Therefore, in addition to fixed income products (both public and private markets), we will be looking at real estate, infrastructure and other “real” assets to assess their ability to do the heavy lifting in terms of giving you the cashflow to meet your requirements. We will give further updates as work progresses, and of course we welcome feedback and dialogue, to ensure that we meet your expectations when we start bringing funds onto the CIV in 2017, after the results of the valuation have been digested.

UK Infrastructure

The CIV team is exploring all possible approaches to investing UK infrastructure, ahead of the submission to government in July. The required size of asset allocation and the long duration nature of the asset demand extreme caution and intensive due diligence on potential investment managers. We have engaged in talks with commercial suppliers, the Pensions Infrastructure Platform (PIP) and other local authorities and pools, in order to determine the best way forward.

We are aware of the need to demonstrate progress on this front, and this was underscored in the recent Investment Advisory Committee meeting and the government’s response to our joint pooling submission in February. Julian (Investment Oversight Director) is preparing a second paper on infrastructure, exploring the routes to market and the requirements for the LBs to take advantage of deals, which can come onto the market with little notice, and typically have tight timetables (in the case of brownfield projects).

With regards to social housing, a meeting with HM Treasury is being sought in order to determine the future course of policy and hence potential investment opportunities in this space.