Interview – LGPS Central
Most active managers have benchmarks, and they are down, but the mandate is to beat the benchmark – so providing they are beating the benchmark they are doing what they should be doing. So yes, there were losses, but they were not necessarily realised losses. Our cli- ents
active defined benefit (DB) schemes, long-term investors, they allo- cate to various sectors on a strategic basis. It was more noise in the markets than realised losses.
are
The godsend from a market point of view was central banks throwing everything at the situation. They have learnt from 2008. This was not a financial problem – it was an economic problem – because they were shutting economies down.
Have you changed your broader asset allo- cation and investment strategy as a result of the pandemic?
The partner funds do the asset allocation. We design products that will suit that allo- cation. The only theme that has come out of this is the fact that sustainability, ESG integration and corporate governance have gone higher up everyone’s agenda. We believe in engagement not divestment – you can make company boards listen to you and improve on an ESG basis by being engaged. The thing the pandemic did is bring the ‘S’ – the social part of ESG – back into focus.
Which asset classes are being internally managed and what have you chosen to outsource? Most of our money is outsourced, but we are unique in that we are the only pool that runs passive equities in-house. We have five passive funds managed in-house: the UK Passive Equities fund, the Global (Ex UK) Passive Equities fund, the Global Passive Equities Dividend Growth fund, an All World Passive Equi- ties Climate Factor fund and the Global Multi Factor fund. The partner funds decide which funds and asset classes they want to meet their liabilities and pay their
16 | portfolio institutional | May 2021 | issue 103
ESG is common sense investing. One that inves- tors have been doing for ages: but it has now become more refined, because there are more identifiable mis- takes that com- panies make.
scheme members – we provide the funds they want. We have five active funds managed by external managers: Emerging Markets Active Equities, Global Active Equities, Global Investment Grade Corporate Bond, Global Active Emerging Market Bond and the recently launched Multi-As- set Credit Fund. Again, the partner funds decide the funds they want and we pro- vide them. If we do not have the ability to run funds in-house we will search for external managers. We also manage a discretionary gilt fund on behalf of one of the partner funds in- house, though this is segregated and not pooled.
Besides CIO, you are also head of fixed income at LGPS Central. Can you tell us
about how the Emerging Market Bond fund the pool launched earlier this year ties into your broader fixed income strategy? One of the big purposes of a pool is to aggregate demand and get something far more economical, because you are a big- ger investor. The methodology and the procedures we go through, refining the process and products to make sure it is what they want. Then we go out and choose the managers. We started the Emerging Market Bond fund manager search in June and July of 2020. It is a stringent process. We nar- rowed the field down prior to being shut- down – and we would always do the last part, which is physical due diligence, by going to their offices and ask about their strategy: how is risk controlled? Who do you work with? Those sorts of things. But we had to do that via TEAMS. This was completed on 18 September, so was done under Covid conditions, and has proved highly successful.
Emerging market debt continues to be a good diversifier to more traditional devel- oped fixed income markets given the choice of local and hard currency markets and the relative pick-up in yield as well as a general underweight allocation to the asset class. The prospect for developed market economies to rebound as the vac- cines battle the pandemic should lead to an increase in demand for commodities, many imported
from emerging
countries. Despite
well publicised defaults and
restructuring that took place during 2020 [Argentina and Ecuador], there remain attractive opportunities with many emerg- ing market markets offering higher quality [by credit rating] investments in local currency terms than in US dollars.
What are the main risks and opportunities investors in emerging markets should consider? Many of the risks are similar to those evi- dent in developed markets, but the sensi- tivities and consequences can be more
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