Lothian Pension Fund – Interview


You can imagine that with a team of only about 20, the capacity to operate funda- mental analysis on each and every stock is going to be difficult. We use the best blend of analytical and quantitative strategies supported by deeper fundamental analysis where merited. We have established core and satellite models. Our core investment strategy is a set of global equity strategies run entirely in-house. We then have a set of satellite strategies with external managers which are typically high-conviction and does something that complements, rather than overlaps.


number one is that equities will outper- form other asset class in the long run. In fact, this has been true for every period in history and we certainly believe it will be true in the future. That is why we have a high allocation. It is the right allocation and there does not tend to be any tinkering with that. It is a strategic asset allocation. We manage something like £8 in every £10 of our assets in-house. We are not naive enough to think that having an aspi- ration to manage investments in-house is enough to get the job done. You need to build a team, to attract, train and retain talent. We have an investment team of around 20 people. We have analysts, portfolio managers and fixed income specialists.


You need to have the right team and sup- port them with the right tools, give them access to research and trading systems. Then, of course, the corporate functions, the middle office and compliance are required if you are managing your invest- ments in-house.


What I would say though, is we do not have a fixed view that we will always be the best team to run any strategy. If, for example, the investment committee decided that they want exposure to fintech through private equity, I doubt we would have the confidence to run that strategy in-house. Instead, we would pick the best provider to operate that for us. That might also be true for emerging market debt or something else that is not within our core skillset.


Does having an in-house team give you more flexibility to change your strategy or are you invested for the long term? This is something I am proud of. It applies to the local government pension scheme community at large that our investments tend to be held long term. We periodically rebalance, but that does not mean we would go 100% out or 100% in just because something has moved on a quant screen. With Coronavirus we saw elevated levels of volatility, which is quite an understate- ment, but at no point did we want to radi- cally shift our book of equities. There are a couple of reasons for that. As I said, we are a 100-year fund invested for the long-run and we accept that we will experience drawdowns.


Our style could be described as low volatil- ity, so we typically hold stocks that are more resilient in dividend terms. That can mean we slightly lag in a rising market but then outperform in a falling market.


Has the crisis forced any shifts in your wider asset allocations? Not significantly. We were underweight equities coming into the downturn, which gave us the opportunity to accumulate. We picked up some holdings that we thought were cheap, but nothing that could be described as large-scale tinkering. It was more a tactical decision.


Issue 95 | August 2020 | portfolio institutional | 17


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