Anthony Parnell is treasury and pension investments manager at Carmarthenshire County Council, which is the host authority for the Wales Pension Partnership. He tells Andrew Holt about how the pool is progressing, ESG and his frustration with infrastructure.
George Osborne’s rationale behind pooling local government pension schemes was to cut costs and increase investment in infrastructure. Five years on, has that happened?
Savings have been made and will continue to be made over the long term on the premise that the pools implement the individual strategies of their member funds.
On infrastructure, the key is that projects need to be there for us to invest in. It is okay to say, ‘increase investment in infra- structure’ – but there needs to be the projects to invest in. We are looking at such projects to see if they match the strategy of our funds.
Ultimately, the picture is that there are several investees chasing a limited number of projects, so it becomes a demand-supply issue. There is no doubt the appetite is there and we have seen an increase in potential projects emerge during the past six months.
What have been your main challenges in establishing the pool?
The biggest challenge was setting up a new pooling entity. No one had done that before. It was getting the operator agreement up and running so we could open- up sub funds and move to a new governance structure, so decisions could, and can, be made effectively.
We have collaborated well as eight funds in Wales. And the challenges have been manageable – to a point.
Have there been any unforeseen problems?
I would not say problems, but challenges. Private markets are complicated, so we need to establish an appropriate structure to take that forward.
How would you sum up your pooling experience?
Pooling is progressing well. It is doing so at a different pace in different pools but that is the nature of pooling. We collaborate well as eight funds and our governance structure is robust and appropriate to our needs.
We are still waiting for guidance from the Ministry of Housing, Communities and Local Government on pooling. It has been delayed, so we are keen to get that out there. And reporting on the Task Force on Climate-related Financial Disclosures – that is going to be a future challenge and something we are going to focus on and assist the partner funds with their report- ing as well.
What have been your successes?
The collaboration and performance figures for the sub funds over two years prove it has gone well, showing that pool- ing has been a positive step forward. That is net performance: taking performance and costs into account. For example, the equity sub-funds have returned more than 40% since inception.
What percentage of your funds have been pooled and in what asset classes?
More than 65% of Welsh scheme assets have been pooled, specifically in equities and bonds.
What is the breakdown of the sub funds?
We have eight in total, all with a range of investment managers, underlying managers and participating funds. Two global equity sub-funds have been established, with an investment value of £3.9bn.
The first of these is the £2bn Global Growth Fund, which was established in February 2019. Link is the investment manager with three underlying managers: Baillie Gifford, Veritas and Pzena. The underlying managers have been selected for their differing approaches to complement each other in a wide variety of market conditions. The fund is broadly diversified across countries and sectors.
Rhondda Cynon Taff, Dyfed, Gwynedd and Powys are the participating funds. The second of these is the £1.9bn Global Opportunities Equity Fund, launched at the same time as Global Growth. It has Russell Investments as the investment manager and has seven underlying managers: Morgan Stanley, Numeric, Sanders, Jacobs Levy, SW Mitchell, NWQ and Oaktree.
It is made up of investment managers who specialise in different regional equity markets. The mix of regional and global equity managers alongside Russell, means that the sub-fund aims to outperform the MSCI All Countries World Index. Swansea, Torfaen, Gwynedd, Rhondda Cynon Taff and Clwyd are the participating funds.
One sub-fund has been established for investments in UK equities. This is the £641m UK Opportunities Fund, launched in October 2019, which has Russell Investments as the investment manager with five underlying managers: Majedie, Lazard, Baillie Gifford, Investec and Liontrust. The selection of managers aims to provide a broad exposure to different industries within the UK equity market. Cardiff and Torfaen are the participating funds.
We also have five sub-funds for investing in fixed income collectively worth £2.9bn. The first four of which were launched in August last year. The first of these is the £547m UK Credit Fund with Fidelity as its investment manger and Rhondda Cynon Ta the participating fund. Second is the £518m Global Government Bond Fund, with Russell Investments the investment manager, with two underlying mangers: BlueBay and Colchester, and Cardiff and Torfaen the participating funds.
Third is the £790m Global Credit Fund, which also has Russell Investments as the investment manager, with Western, MetLife, Fidelity and T Rowe Price as underlying mangers, with Cardiff , Dyfed, Powys and Torfaen the participating funds.
The fourth is the £598m Multi-Asset Credit Fund. It also has Russell Investments as the investment manager and four underlying mangers: ICG, Man GLG, BlueBay, Barings and Voya and Cardiff, Clwyd, Gwynedd, Powys and Swan- sea the participating funds.
The last is the £438m Absolute Return Fund, which was launched in September 2020. Russell is the investment manager, with four underlying managers: Wellington, Putnam, Aegon and Insight and three participating funds: Gwynedd, Powys and Swansea.
We remain con dent that all the sub- funds will be able to deliver strong net of fees performance over the long term.
You have a big focus on ESG. What have you been doing here and how does this impact on your investments?
Climate change is a big challenge. We met Friends of the Earth and had a discus- sion with them on climate change. Our approach is that we do not want to divest unnecessarily from stocks. We need to be pragmatic, but also responsible in this area. We feel that engagement with companies is important in the first instance before considering divestment.
You are also focused on development?
Yes, we are looking at training for the joint governance committee and member funds – training them on investments, governance and responsible investing, so enhancing our member funds in these key areas.
What are your main objectives going forward?
To analyse our sub funds and reduce our carbon intensity going forward, which will also mean looking at the development of investment manager performance reporting, including ESG metrics and climate change risk. As well as reviewing our policies, becoming a signatory to the UK Stewardship Code. We will also look at launching some private mar- ket sub funds.
What economic problems or other challenges do you foresee on the horizon?
More so specific LGPS challenges than economic, namely cash- ow: the continual movement of membership profiles with more pensioners and deferreds and potential unknown challenges as the economy opens up following the lifting of restrictions after the pandemic.