The Border to Coast investment pool is looking to widen the range of fixed income products it offers to local authority pension scheme clients in 2020, according to its chief executive.
After almost two years in existence, the pension pool is already responsible for £15bn in assets under management. However, its 12 partner funds have assets totalling £49bn, illustrating the work still to do before pooling is complete.
Border to Coast “will be focusing on fixed income funds”, reveals chief executive Rachel Elwell. She tells Pensions Expert that the pool is looking to expand into index-linked gilts, alongside an investment-grade credit fund due to launch in mid-2020, for which asset managers have been appointed, and a multi-asset credit fund that is due to come to market in early 2021.
The gilts fund will be managed internally by Border to Coast, and will invest primarily in long-dates index-linked assets.
The greatest challenge for the pools has been, and is likely to continue to be, how to create sensible efficient investment strategies within each asset class in such a way that they meet the needs and, importantly, desires of the member funds
Odi Lahav, MJ Hudson
Pool targeting £35bn of assets by 2023
Over the longer term, the pool will consider what right type of property investments it should offer its partner funds.
Ms Elwell says: “This is a more complicated project, so it’s likely to take a few years to implement.”
The illiquidity of this asset class, along with the costs associated with making changes to allocations, creates complexity and will require a new operating model to be built, she explains.
Fixed income and property should take assets in the pool to around £35bn by 2023.
Whether the remaining partner assets – mostly passive and illiquid funds – will be transferred to the pool will be decided by the local authorities.
Ms Elwell says: “Before pooling, the partner funds worked together to get a joint procurement for these passive funds.”
In addition, a reasonable tail of illiquid investments will take time to reach maturity and can then be transferred across, representing about a third of the remaining £15bn.
Pooling assets a ‘careful process’
Making sure the pool can use its scale to get a better deal for partner funds while also providing what they want is a careful process, which starts with the design phase.
Ms Elwell says: “We talk to the partner funds and their advisers about the characteristics they need from the fund.”
This is often a long operation, which can take 12 to 18 months. At present, the pool is discussing the multi-asset credit allocation with its partner funds.
She explains that these conversations started in late 2018, and the pool is hoping to have the final design of the fund signed off in the first quarter of 2020.
This allocation required a consultation with the partner funds to ensure the pool can be of sufficient size to create additional value for investors, and also due to the fact that the partner funds had different types of credit allocations.
“It has taken time to work with the funds to reach the right compromise,” Ms Elwell notes.
Border to Coast could have launched a number of credit strategies, which could then be selected by the partner funds. However, this option would require the investment committees of each fund to make active asset allocations. It would also be hard to build significant scale within each strategy.
A better option was for the pool to create a multi-asset credit strategy that is managed within certain parameters agreed with the partner funds.
Ms Elwell says: “This reduces the burden of the investment committees and improves the ability of the pool to build scale.
“During our discussions, it became clear quite quickly that the funds would prefer to have a multi-asset credit vehicle rather than specific strategies.”
The pool has appointed a core multi-asset credit manager, Pimco, which is expected to manage around 40 per cent of the assets.
As specialist fund managers are usually better at generating higher returns, Border to Coast will also be appointing specific mandates for global high-yield debt, global loans, emerging market debt – both hard and local currencies – and securitised credit.
Managing partner funds expectations
Odi Lahav, chief operating officer of investment adviser MJ Hudson, explains that the greatest challenge for Local Government Pension Scheme pools “has been, and is likely to continue to be, how to create sensible efficient investment strategies within each asset class in such a way that they meet the needs and, importantly, desires of the member funds”.
This is due to the fact that these pension funds are all different, have different characteristics, appetites and management styles, he adds.
For a pool to make sure it takes the investment beliefs of all partner funds into consideration, it needs to “have active and open engagement and communication with its member funds”, Mr Lahav says.
“Engaging with the managers and other stakeholders, such as LGPS advisers and consultants, is also key to this process.”
Governance is also extremely important, as it is “difficult and often impossible to make everyone happy”, he notes.
“Compromises need to be made to ensure that the pool is able to execute a cohesive and sensible approach, which addresses the core beliefs of the member funds while being fair and efficient.
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“A sensible and representative governance structure is key to accomplishing that goal. Transparency is also an important consideration that goes hand in hand with good governance.”
Jeff Houston, board secretary for the LGPS advisory board, notes that pools face the challenge to “achieve a balance between scale and choice, which enables the vehicles created by the pool to achieve better value – not just lower cost – across asset classes, while giving authorities the range of risk-return opportunities they need”.
He adds: “This balance requires both compromise from authorities and innovation from those designing the pool vehicles.
“In my view, the more that LGPS authorities are involved in the structure, range, environmental, social and governance factors and target outcomes of pool vehicles, the closer strategy and implementation will be aligned and the greater the chance of achieving the desired efficiencies.”
