Innovative and gutsy, Scotland’s Strathclyde Pension Fund was one of the first to invest in emerging markets, yet, interestingly, it steers clear of hedge funds. Pensions head Richard McIndoe explains the fund’s strategy to Fiona Rintoul
“Strategic decisions affecting the long-term future of the fund are made by the Strathclyde Pension Fund Committee,” announces the web site for the Strathclyde fund, which pays 75,000 pensioners and has 130,000 members paying into the fund or waiting to retire. Chillingly, further down are the words: “The committee is made up entirely of Glasgow city councillors.”
As a resident of Glasgow and veteran of many run-ins with her esteemed city council, I tremble on McIndoe’s behalf. Imagine having to explain your every investment decision to a posse of Glasgow city councillors. However, when we speak, McIndoe is upbeat about his relationship with the pension fund committee.
“The committee has a good balance of members who’ve been on it for three terms and newer members,” says McIndoe. “One of my current committee members has been in place for twelve years. The committee is fairly heavily advised by ourselves internally and by the investment advisory panel.”
The investment consultant, of course, also has a role to play in advising the committee of city councillors. In the case of Strathclyde this is Hymans Robertson, in place since the fund’s inception 35 years ago and recently reappointed.
The relationship between pension committee and investment committee must somehow be working; Strathclyde has the reputation of being one of the more daring UK local authority pension funds. The pension fund moved into emerging markets back in 1995, for example, well before it was fashionable to do so.
“It’s a collective effort,” says McIndoe. “We’re looking for the best ideas coming from consultants or other parties. There are more adventurous local authority pension funds than us, but I think we’re pretty go-ahead. We were emerging markets investors long before others.”
Today, the fund has only one emerging markets-specific mandate – with Genesis Investment Management – but its many unconstrained global mandates encompass emerging markets. Managers running these mandates for Strathclyde include Capital International, Baillie Gifford, AllianceBernstein and Edinburgh Partners.
One area where the fund has not ventured is hedge funds. Asked if Strathclyde might consider hedge funds in future, McIndoe sounds unconvinced of their merits.
“Some funds have felt a compulsion to have hedge funds because they’re there,” he says. “I don’t see any need to have hedge funds for their own sake. If we do use hedge funds it will be as a means to an end.”
The fund does, however, invest in private equity to which it has a 6.8% allocation, and it has an active currency exposure. It is currently in the process of beefing up its allocation to property with two property mandates out to tender.
“We like property,” says McIndoe. “We’ve been property investors since 1990 and we’ve been increasing our target exposure to property. In 2006 we agreed to increase it from 8% to 12%, but we never implemented that because the property market was over-inflated.”
The increased exposure could have been achieved by allocating more to existing mandates, but Strathclyde instead decided it was a timely moment to revise its property strategy.
“We typically do that by going out to tender,” says McIndoe, “and rather than deciding ex-ante what strategy we want to adopt, we put out a pretty broad-based tender.”
The tender had three strands: segregated UK, indirect UK and global. If the fund adopts the global strand it will be the first time it has invested in property outside the UK.
“We’ve narrowed the field down to 18 names and kept the potential to use all three of those strands,” says McIndoe.
The Strathclyde fund’s governance structure has evolved organically over the 35 years of its existence.
McIndoe now has two people recruited from the fund management industry on his team. Bringing fund management industry expertise into pension funds is an increasing trend as investment becomes more complicated, and McIndoe says he was “delighted” to hire from the industry.
Just as the governance structure has evolved at Strathclyde, so has the investment profile of the fund. The year when the fund first went into emerging markets – 1995 – was an important marker. That development was followed by the fund’s first use of passive investment in 1998. Other innovations included the fund setting its own benchmark and the introduction of corporate bonds.
Meanwhile, corporate governance, responsible investment and shareholder activism have become an increasingly important part of what the Strathclyde fund looks for in an investment manager.
“We’ve been much more active than other funds in pushing the responsibility agenda,” says McIndoe, who says shareholder activism has moved on from just voting. “We want to know that managers are engaging with companies. We are looking for assurances from managers that they are really looking at the potential financial impact of labour policies, employment policies, environmental policies.”
A full review of the fund’s investment strategy is carried out every three years. From McIndoe’s perspective, any potential difficulties associated with selling the fund’s evolving strategy to the city councillors on the pension fund committee are partially eliminated by the fact that all the investment decisions are made externally.
“The investment managers to some extent explain themselves to the committee,” he says.
This was perhaps particularly helpful after the global financial crisis when Strathclyde’s 2007 strategic decision to apportion a sizeable percentage of its portfolio to global unconstrained mandates made for some uncomfortable moments. The decision to go unconstrained had its roots in the benchmarking debate.
“It became apparent that the benchmark was a constraint to managers and we wanted to take that away,” says McIndoe.
How does he see it now after what he describes as “not an easy ride”?
There is a wry chuckle. “I was never uncomfortable with it as a strategy, but at this point in time the results are not great,” he says.
The fund has stuck with the programme, however.
“All our unconstrained mandates are rolling five-year mandates and we’re only three years in, so I wouldn’t yet say it’s a failure,” says McIndoe. “We keep the whole lot under pretty constant scrutiny but we’ve resisted the temptation to tinker, and that has proved right. Twelve months ago it did look scary but then it did bounce back.”
The bounce-back was obviously reassuring. The latest review of the Strathclyde fund’s investment strategy led to an increase in unconstrained mandates. At the same time, the fund increased its passive core – partly equities and partly bonds – from 25% to 35%. Both moves appear to constitute a vote of no confidence in traditional active management.
As for the future, McIndoe’s concerns include inflation and longevity risks. Glasgow, along with the Outer Hebrides, suffers from life expectancy well below the rest of Western Europe. If the figure could be improved, that would certainly please everyone, but would nonetheless create an actuarial headache at the Strathclyde Pension Fund Office.
There are also perhaps a couple of somewhat darker clouds on the horizon: the political environment and uncertainty over the future of public sector pensions such as the Strathclyde Pension Fund.
“We continue to do what we do in the context of a growing debate about the future of public sector pensions,” says McIndoe. “We don’t know what the answer is,” he adds, “but we know that an answer is required.”
©2010 funds europe