Still in their infancy, the LGPS pools are managing the effects of Covid-19 while many are part-way through transition. Room151 asked a panel of experts to offer their insight on progress so far and the way forward.
John Harrison
The Covid-19 pandemic is the first significant financial crisis since LGPS asset pooling. It is inevitable that some pools will have fared better than others and it will be tempting to judge the success of each pool on its relative performance. It is a temptation that should be avoided, both because the funds offered by each pool are seeking different things and because the time period is too short.
However, there are three aspects we can reasonably consider when assessing how well each pool coped with the crisis.
The first is whether the funds managed by the pool displayed the characteristics expected. For example, one feature of the crisis within equity markets has been a huge disparity in performance between different investment styles, with “value” being especially hard hit. The pool should be able to attribute performance outcomes to the different style characteristics of their funds. Ideally, a pooled fund combining different styles will have experienced lower volatility in relative performance.
The second is whether the pool’s management and monitoring processes worked effectively. This will differ for internally and externally managed capabilities, but partner funds should expect detailed analysis of risk and return and how this changed as the crisis unfolded. They may also want to see evidence that the pool engaged with managers if issues arose.
The third,and possibly the most important, is whether the range of capabilities offered by the pool was sufficiently responsive to changing market conditions. Asset pools are still developing their fund ranges. The market crisis may provide a clearer focus on the prioritisation of “capability gaps”. With the exception of multi-asset credit, most of the funds launched by asset pools so far have been focused on specific asset classes. Having a broader range of multi-asset funds may help LGPS funds navigate future market turmoil more effectively.
The financial crisis associated with Covid-19 is far from over. In time we will have a better perspective to judge how well the asset pools coped. In the meantime, it will be helpful for partner funds to consider whether the market turbulence of the last few weeks changes the priorities for future fund launches.
John Harrison is an indpendent LGPS adviser.
Rachel Elwell
Covid-19 has had a profound impact on the country, the economy, financial markets and our day-to-day lives. At Border to Coast three principles underpin our response to the crisis: Safety of colleagues and partners; social responsibility; and our purpose in supporting partner funds to meet their pension obligations.
Working remotely in the midst of a global pandemic has certainly made life more challenging. Our houses have had to become multi-use spaces; part home, part office, part school. The separation from our colleagues challenges us to find ways to work together—and our demands on home broadband have been stretched. There have also been positive learnings: The mandatory no-meeting lunch break has been particularly welcomed.
Video conferencing has replaced face-to-face meetings, allowing us to connect, communicate and collaborate. We have continued with a range of pension committee meetings and workshops with officers and advisors—rescheduling sessions to fit with the new patterns of working and, in particular, acknowledging the real impact on our partner funds in their wider responsibilities.
Some elements of our development have continued. We launched our first fixed income fund, continued the process to appoint specialist credit managers and commenced a China mandate search. But there will be challenges ahead: Transitioning assets requires a very careful risk assessment, and capacity both at Border to Coast and across partner funds is constrained.
Investment markets have become more challenging, and we are likely to see fundamental changes to economies and companies. We believe that how organisations, and governments, choose to respond will be an important factor in their longevity. Asset owners have a responsibility to engage with portfolio investments to hold management to account in their decision making.
Day by day, we continue to adapt and respond to the new challenges we face. Our principles of safety, responsibility and purpose will be key to our evolving approach, and to continuing to grow together into a strong organisation able to fully deliver the benefits of pooling for our Partner Funds.
Rachel Elwell is chief executive of Border to Coast Pensions Partnership
Laura Chappell
The outbreak of COVID-19 and resulting shutdown of large parts of the economy has brought challenges to pension pools including Brunel, in common with broader financial markets.
These apply to the way we work, as well as how the companies we invest in are operating. But as a defined benefit scheme, LGPS pensions are less impacted by short-term market moves. And as long-term responsible investors, with expertise in risk management, we are well placed to weather the current storm.
Our attention has been maintaining both the focus on asset performance, while ensuring the wellbeing of our staff as they deliver that performance. Across the firm, teams have transitioned effectively to this remote working environment—engagement levels are high, communication has been clear and regular, team heads have recognised the need to keep in close touch with those working remotely. And we have been actively committing time to Mental Health Awareness Week, even more relevant than ever at this time.
As well as looking inwards, we have been able to ensure that clients’ concerns about Covid-19 related impacts are addressed. Our scrutiny of funds making up their portfolios has been a particular issue; the operational stability of those investment managers has been an obvious priority. In this period of extreme disruption, we have been able to deliver evidence-based responses to ensure the resilience of our portfolios.
Our external engagement, alongside our clients, has also been proven to be effective, even at this time. This has been best illustrated by the collaborative work of Brunel and its clients with Share Action related to Barclays bank and the resolutions regarding the energy sector.
Looking ahead we believe that even if one adheres to a long term strategy, major social and financial events do require reflection and as a firm Brunel is analysing key thematic drivers that may emerge from this period as the source of future returns.
Laura Chappell is chief executive of Brunel Pensions Partnership.
Nick Buckland
Whilst all of the world’s focus has rightly been on the unbelievably tragic health consequences of the Covid-19 virus, the LGPS pools—most of which are still in their “build and transition” phase—are likely to have been affected in a number of ways.
The extreme market volatility that has been seen recently will have inevitably affected the planned transition of assets from the underlying fund’s asset managers to the pool’s new arrangements. The pools will, no doubt, be managing these postponed transitions very carefully to ensure that they are delayed no longer than is necessary, and resultant cost savings are realised. However, given the potential for market volatility to return, timing the transitions will be key.
LGPS funds, by their nature, are long-term investors and therefore will have exposure to illiquid private market investments including property. Due to recent shutdowns and market volatility valuing such assets has been extremely difficult, and those LGPS pools that have transitioned these assets will need to address the issue effectively.
On a positive note, there will be a range of select opportunities in private markets as the markets start to recover, and pools will want to ensure that they are nimble enough to take advantage of them.
An additional factor that I think may be concerning the pools, are the changes in asset allocation that could arise from the underlying funds reviewing investment strategies to ensure that they remain appropriate given market conditions and the future.
Whilst the investment strategies will be set with a long-term horizon, the funds may be considering changes due to the recent market dislocation, particularly in credit markets.
Finally, and not related to Covid-19, the recent Supreme Court ruling on LGPS investment guidance will no doubt put LGPS responsible investment in the spotlight even more. Funds and pools will need to be ready to respond to the potential increased interest.
Nick Buckland is a senior investment consultant and LGPS adviser at
Mercer.
