On paper Mike O’Donnell has the toughest job in the pensions industry. The chief executive of London CIV tells portfolio institutional about how he is managing the needs of 32 schemes.
You were appointed chief executive of London CIV in March. How have the first few months been?
Busy. We have been getting out and about meeting all our partner funds, who are both our shareholders and investors. Assets from 31 boroughs, plus the City of London, are in the pool.
Having 32 shareholders is one of our biggest challenges. The other pools have between three and 12 partner funds, which is slightly more manageable.
It adds to the challenge, but also the opportunity. Getting 32 London Local Authorities (LLA) to work together has some real potential benefits.
How do you keep 32 local authorities happy?
You don’t keep 32 local authorities happy by doing the same thing for everybody. You need to recognise that they have different positions and different starting points. It is about having a continuous conversation.
What you want to avoid is ending up in a place where you have 32 different models. We want them to work together to get a bit of convergence, a bit of collaboration between them. That is important.
I was hired because I am from that world. I was corporate finance director for the London Borough of Camden for 13 years, so I know all the key players across London’s local government finance world.
I would like to think I have good relationships with and I’m respected by them. That makes that bit of the job easier for me because I understand what their drivers are and what their competing pressures are.
One of the challenges, of course, is that any LLA finance director is probably able to give no more than 10% of his or her time, if that, to worrying about the pension fund because they have a long list of other significant challenges to worry about.
What was at the top of your to do list when you took on this role?
There were three things. One is to build the team here. We have a few vacancies and have just appointed Mark Thompson as the pool’s permanent chief investment officer (more on page 10). He starts in early September which then completes the top team. Mike Pratten, who also has years of experience in the industry, is holding the role on an interim basis to bolster the team in the short term before the permanent appointment was made. This now completes the top team, which is important. That post had been vacant for too long.
Priority two was to get out and about and hear from the LLAs on how we were doing and what we needed to do differently.
Most of them have recognised that there has been quite a lot of progress. We now have 50% of assets under management or oversight. That is a good starting point, but we need to work out how we move into the next phase of building that to a larger figure.
We also need to make sure that we have the products that they want ready for when they want them. So, hearing from the LLAs about how we engage and resetting, to some extent, our approach to engaging with them was priority two.
It is always useful to share ideas and expertise and if someone else has done it, why invent it yourself.
Priority three is to launch new products. We have had a few funds in the pipeline for some time, typically infrastructure, private debt and global equity core. We have already submitted two of these to the Financial Conduct Authority (FCA) and infrastructure will follow imminently, so we expect to launch all three of those over the next few months.
We have been saying that for some time, but we are now at a point where we are ready to submit to the FCA, so we are confident that they will be ready for investment in the next few months. That is important in terms of LLAs having committed some funding to those and infrastructure is one that we have, for some time, been waiting for.
What is Mark Thompson’s brief?
Mark has significant experience in the financial services industry, holding the position of chief investment officer at HSBC Bank UK Pension Scheme for more than eight years and working for Prudential/M&G Investments for more than 20 years in a variety of senior investment positions.
Mark will lead the investment team and drive fund launches to fulfil the pooling requirements of our clients. His appointment means we have now finished recruiting our top team. I’m confident this means we can continue to progress with delivering the current pipeline of fund launches and tackle some of the major investment challenges we face, such as responsible investment and ESG.
Mark comes with enormous experience and a focus on ESG, so he will serve as a key player in leading on the long-term sustainability of our services and how we can develop our approach to manage risks and foster positive investment outcomes. I’m looking forward to welcoming Mark onboard. The role is fundamental to enforce our strategic framework and to successfully deliver value for our clients.
You have discussed your priorities, but what targets did you set for your first year in the job?
Not specific numerical targets. In terms of assets under management (AUM) – which is not what we fixate on – it is about making sure that we are delivering the pooling requirements of the LLAs.
Having products that the LLAs want to invest in is a measure of our success. That is reflected in them investing, increased AUM will then follow.
The next 12 months is where we will think about that, but we need a conversation with the boroughs about what is realistic over the next three years. Something around the 90% mark of available assets under management is what we would be looking at over the next four to five years. So, there will be quite a significant further step in terms of pooling.
Looking at the 12 months, it probably is more about putting foundations in place, such as building out the team and getting those relationships working better.
I have talked about the three funds that we are about to launch, so we need to get those launched in the next few months. The next bit of the pipeline is liquid loans, inflation-plus and property. Again, in the next 12 months I would expect to make significant progress on those as well. So, getting those launched is important.
The other area I would focus on, which came from the feedback from the days spent out and about visiting LLAs around London, is doing more on ESG and responsible investment issues.
We have a solid starting point in that there was a responsible investment policy agreed in the autumn by the CIV, which was before I arrived. That policy was agreed unanimously, which is no mean achievement across 32 LLAs of different political complexions. This is not often a party-political issue, but boroughs have different views and starting points on this. There has also been some recent shifting of sands in terms of views on engagement versus divestment, particularly in relation to climate change. Climate change has always been up there, but it feels like it has really risen every further up the agenda in the past six to 12 months. We are seeing a lot of individual LLAs doing a lot of thinking about their own ESG policies.
The role of the CIV, of course, is to be ready to support that, so looking at carbon exclusion funds and low carbon funds are the sort of things that we are going to have to look at over the next 12 months as well.
It is interesting that you mentioned carbon exclusion funds. It is difficult to find a company that doesn’t have a carbon footprint somewhere in its value chain.
I agree. Often people talk about these things without having thought through the detail. That is what we are doing now. Our clients have significant commitments to do more in these areas and are doing the thinking right here, right now in terms of what that means for their investment strategy.
They are at a point in the cycle where they are all doing their triennial valuations and that is usually a prompt for re-thinking their asset allocation strategy. When we get to the back-end of this calendar year, we will be having some more concrete conversations with LLAs about what those emerging investing requirements look like in terms of ESG, but also more generally.
Are ESG and sustainability quite big topics for London CIV?
Yes, and that is the case for all pension funds these days, not just for local government pension schemes. Private sector funds are, quite rightly, being encouraged to think about climate change risk and ESG more broadly. These are things that potentially should drive investment decisions.
What do you look for when picking fund managers?
We have a fairly rigorous fund manager selection process. We look at the available universe, we will look at who is out there. We look at the performance track record, although we know that past performance is no guarantee of future results, so we don’t place too much store by that.
Essentially, we are looking for consistency, a sound investment philosophy and the strength of the team. A team that not only has a track record in delivering but a philosophy and a strategy for doing that, which can be replicated, is what we look for.
We are all doing something that is quite new and innovative.
Does ESG feature in the process?
We expect all our managers to have ESG as part of their investment considerations and process, whether that is through engagement or stock selection. It should be a consideration as part of everybody’s investment strategy.
Any plans to invest directly in London?
No immediate plans. We are, as I said, looking to launch an infrastructure fund shortly. That could well come with some London investments, but it is not a London-focused fund. From the conversations we have had with the LLAs, there is significant interest in investment in housing within London. So, we will want to respond to any demand for that, but the challenge of those sorts of things is concentration of risk and investment returns.
The bottom line on all of our investments is that they are there to generate return and to help fund the pensions liabilities of the local government pension schemes across the LLAs.
Your proposed infrastructure fund was on hold for a while, so what stage are you at with it now?
It is progressing well. We expect to submit it to the Financial Conduct Authority in August. So it is pretty close to being ready.
Because there have been delays, we are going to have to go around and speak to our clients again and look at who is ready to put money in the ground over the next few months. It will be of significant scale, probably about three or four investors, but I am not able to put an exact number on it just yet.
There are groups where members of the eight pools come together to discuss their work or to co-invest. What are benefits of participating in these discussions?
We learn from each other. We are all doing something that is quite new and innovative. The important issue is that we all started from slightly different places, so it is about learning what the others do and how they have done it because we end up doing these things slightly differently.
I was in Leeds recently talking to colleagues at Border to Coast and heard about their journey. We are not going to do the same thing because we have different starting points.
They have a history of direct investment, which we have not had in London. It is just interesting to compare notes on how to structure funds and the options in terms of the different legal structures that are available.
We all have an interface with the Ministry of Housing, Communities and Local Government and make sure that we are having good conversations with them about the future of pooling, which is important. It is always useful to share ideas and expertise and if someone else has done it, why invent it yourself.
We are halfway through the year and it seems from our conversation that we can expect positive news-flow in the second half of 2019?
Yes. There has been good progress to date, but we are now entering a new phase where we are fully resourced, have the top team in place and are finding a way to work more positively with our shareholders/investors that will enable us to move forward much more quickly.