FT Investment Management Summit: The London Pensions Fund Authority could run as much as half of its assets in-house within the next three years, cutting the fees charged on those assets by three-quarters.
The LPFA this year announced a £500m infrastructure investment programme with the Greater Manchester Pension Fund and a £10bn asset and liability management partnership with the Lancashire County Pension Fund.
We’re saving 75 per cent on the fees we were paying to external managers, and as we scale that up, there’s not significant additional marginal costs
Chris Rule, LPFA
Local authority schemes have come under increased pressure to collaborate in recent months since chancellor George Osborne invited proposals on cost cutting and investment pooling across the Local Government Pension Scheme.
Speaking at the Financial Times Investment Management Summit Europe this week, Chris Rule (photo, middle), chief investment officer at the LPFA, said: “At the moment we run in-house around 20 per cent of the portfolio, I think short-term that’s roughly where we’ll be.
"As we bring in-house a greater degree of the private markets activity and scale up a little bit more on the liquid equities side, I would expect us to be getting towards the 50 per cent mark in the next three years, but we don’t have a hard target.”
Cost savings
He added that the scheme’s internal equity portfolio, which is now approaching a billion dollars (£658m) in size costs just a quarter of the fees charged when the mandate was run by external managers.
“If I factor in the headcount and infrastructure spend… being conservative, we’re saving 75 per cent on the fees we were paying to external managers," Rule said, "and as we scale that up, there’s not significant additional marginal costs.”
However, Rule added the move does increase internal costs.
“We have particular pressures in our sector around the public perception of us spending our money internally on people and systems because it’s under the public eye," he said.
"I’d rather spend 25 per cent of the cash doing it internally and save 75 per cent on the external fees, but it will bring up our internal fees from where they were before.”
However, Tony Broccardo, chief investment officer for the Barclays UK Retirement Fund, also speaking at the event, said there were two aspects to running investments in this way: how much of the assets and how much of the risk is run in-house.
He said: “When we set up our arrangement at Barclays five years ago… instead of having a traditional trustee board, trustee investment committee and then asset managers, we basically got rid of the trustee investment committee and all the strategic work that the committee did went back to the board.”
This made the board function more like a corporate board, focused on strategy, he said.
“Everything else that investment committee did – oversight of manager, asset allocation – is done by the in-house asset management company, called Oak. In doing that, we oversee and run around 80 per cent of the risk, but it means we actually run a limited amount of the assets.”
As the scheme shifted its asset allocations it replaced much of its active management with futures to give it factor exposures, allowing the scheme more flexibility and less cost when making strong commitments to investment positions.
