Mark Mansley, chief investment officer of Brunel Pension Partnership, discusses the challenges of dealing with the regulator, negotiating change at company level and how the pool intends to punch above its weight as a shareholder.
How has the first year of the pool been?
The asset pooling is probably a much bigger and more involved process than a lot of people envisaged. The detail of setting up entirely new regulations is quite challenging. Brunel came into being in July last year. We started bringing on staff thereafter and we moved into our offices in October 2017. That was a major step for us. We did a major procurement to appoint our custodian administrator, which was already partly initiated before Brunel even existed but was completed in conjunction with Brunel. The first big job we had to do was getting Financial Conduct Authority (FCA) authorisation. That was a major piece of work which we brought in on schedule, receiving authorisation in March.
Just in time before the April deadline then?
Yes, the government initially gave the impression that they expected it to almost happen overnight, but now understand that it’s a long process with several big milestones along the way. Getting FCA authorisation was a key step of that.
On the investment side, building a team was key. Last summer we had a team of directors and a couple of employees. We now have a team more than 30, so there has been a big build-up of recruitment and resources.
We then started looking at appointing asset managers. Our starting point was to find a manager for our passive equities mandate and we appointed Legal & General Investment Management (LGIM) in May.
We did the transitioning in July with about £5bn to £6bn of assets brought into the Brunel pool, which is being managed by LGIM.
That process went very well; we achieved major cost savings and lower transition costs than expected.
Another major decision that Brunel made was to launch a tax-efficient Authorised Contractual Scheme (ACS) vehicle. Our approach is different to the other pools. Some pools have essentially chosen to be the ACS, which requires additional authorisation from the FCA and regulated capital. Instead, we decided that a third party would operate the ACS and appointed FundRock to that role.
Although we are not the operator or authorised contractual director, we are the ACS’ sponsor and investment manager. So there is a two-way relationship going on, which is working very well.
In contrast to some of the schemes that are using outsourced providers, we are in control of the process. We are using FundRock as a platform because they are experts in fund administration. They liaise with the FCA, which is not something we are experts in and so are quite happy to outsource that.
On key areas of the actual investment offerings, manager selection and portfolio construction, we remain in total control. We felt this was the most efficient model that also plays to our core strengths.
Another area where you differ from some of the other pools is using third-party asset managers rather than managing funds in-house.
Yes, we have not particularly sought to acquire internal fund management capabilities. It is something we keep under strategic review, but at the moment we feel it would come with additional burdens and challenges and we are making good progress in sourcing managers that offer us cost savings. From our point of view, it would be challenging to achieve this more cheaply than the asset managers. Starting from scratch is obviously different from schemes which have an established operation.
Indeed, some pools, such as Border to Coast, had pre-existing investment management teams so it made sense to do part of the fund management in-house.
I’m fairly sure it also comes with additional challenges for them, which I am sure that they will have under control. It is obviously a different matter having investment management capabilities for your own scheme or doing it as part of an FCA-regulated pool, so we have avoided that for the time being. Coming back to the ACS structure, another key difference to other pools is that we have always said that the ACS is for those assets where it makes sense. At the moment that means active-listed equities, while passivelisted equities are being managed by LGIM on their platform.
We are doing what seems right for our pool, and the other pools will likewise be finding their own path.
Certain asset classes, alternatives in particular, cannot fall under an ACS structure.
That’s right. One of the challenges with a lot of passive funds was that they do not fit with an ACS platform so it didn’t make sense to try and squeeze them into it. There have also been challenges with things such as limited partnerships.
Anyway, the ACS is a useful vehicle. It is good for some things, but it doesn’t cover all eventualities and all markets. We have always taken the view that we are not beholden to a particular structure. As we move through the latest stages of the transition we will always look to see if the ACS continues to be the right structure or if maybe some other structure might be more useful.
So that has been a big exercise which has caused a delay in the process because it was an extra procurement and required an extra round of compliance with FCA regulations.
As part of that we also started our search for two managers for UK equities. That search is moving to its latter stages. We have found some good managers who are competitively priced and we are working on some of the legal negotiations. Hopefully we will have an announcement before the end of the calendar year.
We – and all the other pools – are increasingly having to recognise the complexity of managing an FCA-authorised entity in terms of policies and controls, which is quite an extensive piece of work, particularly in an ACS structure. So if people are wondering why we haven’t done more, well this is the reality of being a regulated entity.
What is the difference between the previous LGPS schemes, which also had to comply with FCA regulations, and the pool as an FCA-authorised entity?
The LGPS funds had to comply with LGPS regulations and were not FCA-authorised organisations, with the exceptions of one or two. The fund managers they invested in had to be, but not the funds themselves. The 2016 LGPS Investment Regulations that required pools to be established insisted that they were FCA-authorised. Brunel Pension Partnership is therefore a separate FCA-authorised firm.
The issue is that being an FCA-authorised firm doesn’t end with getting approval from the FCA. That is very much the beginning of the process. There is then an expectation to have certain policies and processes in place, even more so if you are working closely with a partner or other firms.
So we have had to document about 80 policies covering everything from best execution, to conflict of interest, risk management…the list goes on and it was quite a job in terms of building the infrastructure of an investment firm in the short-time frame that we had.
The other challenge is that as a regulated firm and managing investments of defined benefit pension funds, we are long-term investors. We are essentially a neutral entity owned by our client fund and while some things were well established, other things we have had to re-work ourselves.
So the dominant theme over the past few months has been to make sure that everything was in shape for the ACS, which has been time consuming, and we would rather be doing manager selection but we are, of course, in a transition phase at the moment. This big job happens once, we might have to occasionally be updating things, but we have definitely done a lot of the upfront work now.
If you look at the pooling process overall, it seems to have gone rather quickly from George Osborne’s first announcement in 2015. Would you say the process, including the April 2018 deadline, has been a bit rushed?
It is worth remembering that all the pools are a long way from finishing the process, so it depends on what you mean. There has been an awful lot of ground covered in the past three years. The pools have been set up and are largely operational, but in terms of actually transitioning there is still a lot of work to be done. We still have another two years or so until we get close to the beginning of the end of the transfer.
For Brunel, the latest updates I have seen mentioned around £6bn in assets being pooled and the rest are still in the process of being transferred. Is that right?
The £6bn would be referring to our passive equities mandate which transitioned first. We then have the first two portfolios as part of the ACS structure which will account for another couple of billion, with more coming over next year.
The other area we are currently working on is the whole private markets, private equity and debt side, which also includes infrastructure. We actually brought forward our plans here as we built up our capacities and identified an opportunity to save a lot of money for our clients by transitioning some of the funds on board sooner than expected.
These are often quite illiquid assets which is why many pools have said they will be merging them last. Is saving money the only reason for transitioning it so early?
We identified that some of our funds had property multi-manager accounts where you pay for the management of a portfolio of property funds. While the individual property assets are fairly illiquid, the property fund management service is something that we can do at Brunel a lot cheaper than using a third-party manager. We can pay out that level of fees and bring them on board. That was one of the first steps we have taken and we have been making good progress in terms of new investments so there should be further announcements coming up on that soon.
One of the key motivations behind LGPS pooling was to make investments in infrastructure and property more efficient. Are you looking to work with other pools to
invest in infrastructure?
We are doing a lot of liaising with other pools. We are for instance sharing ideas on some of the illiquid investments. However, pools are at different stages of readiness. We do have our infrastructure commitments now in place and the team have been putting forward some interesting infrastructure opportunities. What we are finding, certainly in primary markets, is that pooling is working quite well. We are able to employ a bigger team and get a good sense of the market. We have people approaching us with interesting ideas and with the potential to work together and collaborate.
It is quite striking how different the strategies of the individual pools are. ETFs seem to be one of the first investments you decided to pool, whereas other pools said they are not planning to pool their passives because it doesn’t offer more cost savings.
On the passives side we have made a lot of savings. You can argue to what extent that is due to broader market trends because there have been a lot of cost pressures on the industry, yet we feel comfortable that we have achieved best pricing.
You joined from the Environment Agency Pension Fund where you did a lot of ESG investing. Given your background, what role does ESG play at Brunel?
The core part of Brunel’s approach is that we do regard responsible investment as an integral part of our investment processes and we have made good progress in that area too.
We have agreed our responsible investment policy and are currently working on the details of our stewardship policy. Now that we have about £30bn of assets, we also have a more powerful voice, but again we still need to work in partnership.
We are also looking at more specific impact-type investments in the private markets, where we might well see a strong ESG theme, and in listed markets. We have a sustainable equities sourcing strategy which is not launched yet but when it does it will aim to be a market leader.
Across our practices, we have been integrating ESG risk management approaches. All good managers nowadays should be able to think about ESG in an intelligent and sensible way and be aware of some of the risks and sensitivities. That is already part of our manager selection progress and will continue to be so.
In the first place you would have had to develop a joined-up strategy between the individual schemes?
We have always taken the view on things like stewardship or voting policies that in order to be effective, the pool needs to work as one. Having a diverse approach would be incredibly resource-inefficient and also inefficient in terms of achieving change.
If you are looking at engagement and stewardship in voting, the essence is to do it well, which is about being focused and having the right resources. We have also put effort into really trying to achieve change at company level.
While we have quite a lot of scale ourselves, we can achieve more by bringing in partners and other organisations. We have had conversations with two of the largest companies in the world over the last months, two very big American companies; we are quite keen to do more of that.
Companies like to talk to their end investors instead of just some of the brokers and fund managers, that was quite an interesting development and we are quite pleased to be able to do that.
You have mandated Hermes with your shareholder engagement policies, but you are still looking to engage with companies directly. If so, how will this collaboration work in practice?
We have had a good relationship with Hermes for a number of years. A lot of the time it will be the case that Hermes just gets on with it, working more at the policy level. On a selective basis, we will probably pick up on individual companies to work with where we have a particular interest.
We are going to be closely involved, but with potentially 2,000 companies owned by Brunel and close to 20,000 shareholder votes we have to outsource that work so we can focus on where we think we can have interesting conversations in-line with our priority list.
So overall, compared to the individual local authority schemes, you are in a more powerful position to engage with companies?
Yes, we do have the increased scale and also some of the other work we have been doing with companies gives us a leadership position above our size. Of course, £30bn is a lot of money but in the grand scheme of things it’s not a huge sum of money. Some asset managers have a hundred times that but what makes us different is that we are progressive as opinion leaders and companies are interested in talking to us to get a sense of where the world is going.
Looking ahead, what will be the key challenges for the pool next year?
For us, it is now about delivering the transition and set up the portfolios. We are gearing up to bring in about 50% of the total pool of assets by the end of the year and hope to bring up the total assets under management so there is now a real focus on working with managers.
So for us, it is now all about delivering the transition, set up the portfolios.
We do want to do a thorough job in manager selection, which involves open manager searches, two phase searches and engaging with the market. We do feel that that is the responsible thing to do and makes us highly competitive, although it does come with the challenge of having quite a lot of manager interest. There’s a massive workload that comes with that.