Notts fund: stable investment ensures performance

In June, the government issued a call for evidence on how to improve accountability, transparency and cost effectiveness in local government schemes.  

In its response, Nottinghamshire suggested, among other recommendations, that efficiency and costs could be improved through an investment strategy that does not focus on short-term performance.

The £3.5bn scheme cited recent research from data provider The WM Company that found simpler investment management structures tended to outperform in the long term.

Nottinghamshire said the fund’s performance has been good partly because it has not constantly switched strategies and managers.

Nigel Stevenson, group manager of financial strategy and compliance at the council, said the scheme has long-standing relationships with investment managers.

“This is not to say that we haven’t switched investment managers in the past for poor performance, however these decisions have been based on the investment manager’s long-term performance,” said Stevenson.

This year the fund recorded a performance of 13.9 per cent compared with a benchmark of 12.5 per cent.

“Chasing ‘flavour of the month’ investment strategies and changing every year or two will not help to provide sufficient long-term returns and may dramatically increase costs,” said Stevenson.

Nottinghamshire had investment management costs of 0.18 per cent of net assets in 2012/13. Stevenson said simpler investment strategies mean lower management fees including reduced trading and transition costs.

Keeping costs down

Kevin Frisby, partner at LCP, said the consultancy discourages frequent manager changes due to the cost. “It can cost in the order of a 1 per cent round trip to change managers on the assets you have,” he said.

He suggested that schemes have an enduring strategy and set of managers but not a static investment strategy. There should be a focus on changing the amount of assets each manager has, rather then changing managers, he said.

“Trustees would be best served getting the strategy right and making sure they have the ability to take profits and derisk with the managers they’ve got, rather than spending their time assessing manager A versus manager B,” he said.

Ben Inker, co-head of asset allocation at asset manager GMO, said chopping and changing managers is both time-consuming and expensive.

“A lot of the reasons why pension schemes have a tendency to go out and change strategies are because they don’t have a fully formed idea of what they are trying to do and how they are trying to do it. And it is easy for them to be swayed by performance and a cool new story,” he said.

Rather than taking time assessing performance on a regular basis, that time would be better spent on due diligence of managers before they are put in place, Inker added. Schemes could consider hiring a manager and not replacing them for at least five years.

However, David Bennett, head of investment consulting at Redington, said it is important for trustees to be aware of “flavour of the month” opportunities as they can sometimes meet strategic requirements.

“[But] spending too much time chasing such opportunities runs the risk of absorbing time and effort and of distracting trustees from the more important task of managing their strategic asset allocation,” he said.

“Trustees would be best served getting the strategy right and making sure they have the ability to take profits and derisk with the managers they’ve got, rather than spending their time assessing manager A versus manager B,” he said.