The People’s Pension – Interview


Volatility for a 30-year-old means cheap assets in the long-run


long-term planning with the trustees around climate change, but the point where currency risk becomes more important is as the asset size grows. This might become something we could either take on or hire a more active manager, but right now we do not think that is where our governance priorities sit.


You mentioned Brexit and have a relatively high allocation to UK equities. Are some of the risks priced in?


There are two things. One, we are a long- term investor so are not timing markets. Also, this is a UK workforce, most of whom will retire in the UK. We recognise our members are working for these com- panies. Investing in pound-denominated assets helps as well in terms of currency hedging. There are a number of different pieces here, but we need to explore the free movement of capital at some point. If I have a worker in the North East of Eng- land, we suck money out of his employ- er’s pocket. Why should that go exclusive- ly to capital investments around the world? We do not have much of a UK bias but there is a bit of a legacy of investing in market cap. I am not sure if the mega-cap or listed equity space is the right place to


express that kind of UK bias. We should have a sense that this is UK money from UK employers which should go back into UK companies. That does not mean that we have to back individual companies or industries that are failing. We are not here to do bailouts of companies or industries that are struggling to exist in the future economy, but we need to have a sense that the UK is the place where this money came from and ultimately will go back to.


How you are implementing responsible in- vestment strategies across your scheme? We see responsible investment as being three activities: investment, exclusion and engagement. First is investment, which is about taking data, asking ourselves wheth- er a portfolio construction technique using it can add value and giving our- selves some belief and conviction in that. Ultimately, if we think that data in our portfolio construction technique can add value for members then we have to do it. Secondly, we may not have the data or the conviction but the topic itself might only affect a small number of companies, for example, controversial weapons, so we can exclude it. Thirdly, if we are exposed to an issue, then we should be engaging with compa- nies on it. A passive investor would put that first because they feel obliged to hold every company in the index. There are companies where we fundamentally think that by not holding them, we can add value for our members. That does not mean engagement is less important, it just means we get a cleaner portfolio.


Looking at your largest 100 holdings, you are invested in a lot of oil companies. How are you engaging with them?


The difficult bit is that if you look at these big oil company names, a lot of them have some pretty big green energy holdings. A lot of the work we have done around cli- mate change is analysing if we can get rid of these companies or would that have other detrimental effects? Adaptation


scores or green energy scores shows that if you follow a strict exclusion approach towards these companies then you lose out a lot in terms of green technology. The engagement process is about that challenge. If there are 100 fossil fuel stocks, then we will not need all of them in our portfolio. We can be more sophisti- cated than that. If you are more of a green energy company than a brown energy company then you are attractive to us. There is a way of saying to them: “This is where the line is. If you are close to the line, you probably would want to run faster. If you are on the wrong side of the line, then not only are we not going to hold your equity, but at some stage we are not


going to refinance your bonds


either.” It is with the cash, the liquidity financing, that probably the most impact comes. We want every company to understand the principles by which we invest, broadly that is the best way for them to under- stand why they got an investment. Over time we want to tie the bond finance to the equity finance and get most value from our engagement.


What are the People’s Pension’s key tar- gets over the medium term? This is a governance journey. We now have £11bn in assets, in five years’ time we will probably be looking at £20bn to £30bn. Very few institutions of that scale were created in such a short period of time. That has pros and cons. The cons are probably the pace of that, we need to grow our investment capabilities as rapidly as we can. The pros are that we do not have to go through all the mistakes other institutional investors have, we can probably get to the punchline a bit quicker and learn from them as much as possible. We will be a lot more focussed on tech and on the systematic focus, which was not available before, and all the while making sure that we understand how we add value and deliver that in a good gov- ernance environment.


Issue 98 | November 2020 | portfolio institutional | 17


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