Mike Weston discusses his first month as LGPS Central’s new boss, the importance of responsible investing, private equity and doing the small stuff well.
How would you describe your first month in the role?
Busy but focused. We at Central have one priority, which is delivering the investment returns that our partner funds need to secure their pension payments over the long term. There are approximately 1 million members covered by Central’s partner funds and perhaps double that if you put their dependents in.
Delivering those returns is based on three pillars. Firstly maximising the benefits we can get from the scale that comes with pooling.
We are targeting £250m of cost savings by 2034. We have private market funds coming on stream to improve access to those asset classes and at a better cost. There is also internal management of passive equity strategies.
These are the ways that we can maximise the benefits of scale. Secondly, it is about recognising that this is a huge change process for everyone involved.
Finally, we need to be is the positive alternative for our partner funds to the traditional asset managers that they would have used before pooling came along. That is all about being FCA-regulated because there is a long-term focus and benefitting from total lack of conflict of interest. Partner funds are our clients and our owners.
We are bringing together people from a local government pension scheme that have a public service ethos with people from the private sector that have a commercial focus and then making the best of the unique combination of talented individuals.
Everything we do is also supported by being a responsible investor in everything that we do. Responsible investing is important to our partner funds.
What is it that you want to have achieved by your first anniversary as CEO?
In my first month I was able to celebrate LGPS Central’s first anniversary on 1 April. It was a great opportunity to reflect on what we achieved in the first year – roughly £20bn under management and advice from nothing in a year is a fantastic achievement.
Huge progress has been made, but there is still more to do. Recognising that there is still a big process of change, so there is a huge communication need amongst the partner funds, the pension officers, the section 151 officers, the elected members of the partner funds and everyone within Central because we are all trying to go forward together at the same time and do all of the development that is needed. A lot of my time so far has been out and about across the region meeting the partner funds to ensure that the communication is strong. Taking that on is going to be a key part of what I will need to do in my first year.
It might sound dull, but we do not need any more radical structural change in the next year. There has been enough of that as there is in terms of getting the pool up and running.
The key priorities that I will be judged upon in the first year are the delivery of the promises that we have made to our clients. That is delivery on our investment promises. The partner funds have given us assets to manage, so we need to be delivering on investment performance and operational performance.
We are working with and competing with established asset managers, so we have to be operating at the same level of effectiveness and efficiency that they are operating at.
We also must deliver on the client service promise that we have in terms of involving our clients and communicating with them, making sure that they are comfortable with what we are doing.
Secondly, maintaining the momentum. A lot has been achieved in the first year but there is still a lot more to do. We need to build on that great start and all the effort that was put in to get Central up and running.
Part of that is launching new funds to provide the range of asset classes that our partner funds need to execute their full strategic asset allocations through Central.
As individual funds remain responsible for the strategic asset allocation to meet the liabilities, we need to provide the fund suite of funds to enable them to deliver the returns they need and pay their pensions.
We also have a strong recruitment plan for this year. We are hiring additional people and developing our existing people, looking at making sure everyone gets the training that they need and put succession plans in place. So it is about strengthening, developing and growing our team.
It might sound dull, but it is the nuts and bolts, nitty gritty of growing an organisation that is still very new in its own right.
We strongly believe in collaboration with other pools.
At what stage is LGPS Central in its pooling plans?
We are making good progress. The funds that make up Central pool have £45bn of assets, so having roughly £20bn of that being managed or advised on by Central is a good percentage.
We are looking to grow that as we go forward, but it is a good start.
We have delivered cost savings that have been above our initial expectations on the funds we have launched so far. We will look to build on that.
We have a responsible investing team here that has put a responsible investment and engagement programme in place. That is now operating at the scale of the pool, so it is having more influence.
We have over 50 people and have recruitment plans for this year.
We are making good progress on the pooling programme.
One of the reasons behind pooling is to increase investment in infrastructure. Considering your previous role at Pensions Infrastructure Platform, do you have any plans in this area?
Yes, we have plans. Historically our partner funds have had a range of allocations to infrastructure which have included a range of exposures in direct assets and high returns.
We have been working for a while on an investment vehicle that will meet all of their needs. We are making good progress on that and expect to launch it in the summer.
You have a few equity funds. How are they being prepared to face more of the volatility that we saw last year?
We have a global equities fund, an emerging market equities fund and we are working with West Midlands Pension Fund on a sustainable equities fund.
If you look at the partner funds’ asset allocation, they have a large proportion of equities in their portfolios, so it is not surprising that equity funds are at the forefront of our fund launches.
It is worth reflecting that our partner funds are open defined benefit schemes with long-term liabilities, so we take a long-term approach when designing and implementing the funds that we launch for them.
So we focus more on how managers are impacted by volatility and how they respond to short-term volatility and critically what it means for their ability to deliver on our targeted long-term risk-adjusted returns.
We are focused on long-term returns. We are not trying to do short-term market timing and we do not want managers that are looking to do short-term market timing.
It is more important to us to know and understand how a manager’s processes work and what they do when volatility comes along and how that does or does not impact their internal processes.
You are launching an emerging market equity fund later this year. How is that progressing?
We have worked with our partner funds and have selected BMO, UBS and Vontobel to manage that fund. We are progressing through the final stages of due diligence and working on detailed transition planning.
What is your strategy in private equity?
We launched the first fund on our private equity platform on 31 January. The current private equity fund has two sleeves. It has a primary fund investment sleeve and a direct investment sleeve.
The strategy is to mix the two styles of the investment, which allows us to average down on the high investment costs that are typically associated with private equity investment and therefore enhanced riskadjusted returns. That is the 2018/19 vintage.
Our strategy is to launch annual vintage funds with the strategy for each vintage being set according to the prevailing PE environment at the time.
When we go through the process of launching the next vintage we will look at what is going on in the market. We have an in-house private equity team of four, which means we can stay close to the market and tailor that successive funds in a way to maximise risk-adjusted returns.
Having a dedicated resource within LGPS Central means that we can help our partner funds move away from the more expensive fund of funds-type investment.
Are you working with other pools on investments?
We strongly believe in collaboration with other pools. There are several cross-pool collaboration groups. There is a responsible investing sub group and an infrastructure sub group, for example.
I meet with my fellow pools’ CEOs and the risk and compliance teams also meet, so there is collaboration going on.
We as pools have similar issues across a range of organisational areas, which includes an awful lot more than just investment.
It makes sense for us to share experience and expertise where we can. Ultimately, it is about delivering better outcomes for all LGPS members.
It is something that is going forward and we are happy to be working with other pools.
What is your ESG policy when making investment decisions?
We set a policy by developing a robust and detailed responsible investing framework. We put that framework in place before we launched any of our funds.
We put that framework together by working with our partner funds and understanding their ESG convictions and how they fit into their investment philosophies and principles. How we incorporate financial materiality of ESG into that framework.
Getting consistency of how we operate with investment beliefs and policies is important to us.
Having done that, we have a three pillar approach to managing our responsible investment policy: selection, stewardship and transparency.
Selection is all about how we integrate ESG into internal investment products and external manager selection.
Stewardship is about monitoring, engagement voting policy and influence.
Transparency and disclosure is about making sure that our managers are transparent in disclosing to our partner funds stewardship reports, full voting records, consultation responses, all of that sort of thing so that everyone knows what we are doing.
Having defined the responsible investing framework, any manager we select has to demonstrate how they would operate within that framework, so we need consistency. This is not an optional extra, it is an essential ingredient.
Are your funds free to invest in oil and gas companies?
Yes, they are. We and our partner funds have a preference for engagement rather than exclusion. We prefer engagement because it is more likely to lead to better societal and fiduciary outcomes rather than divesting.
If you divest you limit your opportunity to diversify risk and you remove your ability to positively influence companies.
Clearly, you have to make a consideration in all of your investments.
If you divest you limit your opportunity to diversify risk and you remove your ability to positively influence companies.
What is the financial materially of the ESG elements of a particular investment? How do they come together?
There has to be a fiduciary case and a responsible investment case. A good example is that we have had engagement success with Royal Dutch Shell’s commitment to decarbonise its business in line with the Paris Agreement on climate change linked to the re-numeration of 1,200 senior managers.
The financial dynamics of investing in Shell were positive but we needed the responsible investing element of that to line up as well. By engaging with them in partnership with other industry groups we managed to achieve progress there.
We have to be good stewards of our clients’ capital, we have to be transparent and we have to work on an industry-wide basis. We are very public in our commitment in this area and these policies will carry on.
What news-flow can we expect to read from LGPS Central in the remainder of 2019?
There will be more fund launches, more staff hires and a continued focus on being a responsible investor.
On fund launches, we are collaborating with a partner funds to put those together. We are mindful that it is the triennial valuation of our partner fund schemes. As they work through that process we have to be flexible enough to respond to any changes in strategic asset allocation that might come out of that.
We have a fund development process that enables us be flexible and make sure we are providing the products that our clients need.
Cost savings are also a focus. We don’t want to eliminate all other cost savings by building an enormous cost base within Central. So our hiring plans are related to the new funds that we launch so that we have the expertise when we need it.
When we launch the infrastructure fund in the summer, we have an infrastructure team in place and are looking to grow that team so that the additional resources are in place when the fund launches.
There will also be a continued focus on being a responsible investor. That world is moving quite fast. Climate change is a major issue and we are focused on at the moment.
There is nothing particularly radical about it.
It is doing all of the detailed stuff well and making sure that we are communicating and moving forward as a group with our partner funds and providing the returns they need to pay their pensions over the long term.
