Interview – London CIV


Rather than having a wage price spiral into a price interest rate spiral, raising rates could encourage increased prices. So, quite frankly, if we are not going through a bad debt cycle, the biggest ben- eficiary will be the finance sector, which will benefit from rising interest rates. Higher interest rates are good news for some parts of the market.


So, we might see a change in the type of equities that do well, perhaps income and value rather than growth stocks? Absolutely. The starkest change we might see could be a reversal between growth and value. Value has underperformed for 10 years, and we are seeing quite a severe reversal of late. Obviously, when you get 10 years of success in growth assets, a lot of clients will be overweight growth. That is one of the challenges going forward. We need to think about if we want greater factor diversity in our portfolios.


You don’t want to make that call too early? Yes, as the value/income funds we had in the past have long been closed. So, if a cli- ent decided they want to invest in value, we do not have a product immediately availa- ble. This is something we will look to estab- lish with our clients. But for this to happen, we need to be certain that what happened in the past six months is a confirmation of a longer-term trend. It will take some time for our investors to recognise that, but we may be getting to that stage.


So, you may be looking at asset managers offering value funds?


LONDON CIV Chief executive: Mike O’Donnell Chief investment officer: Jason Fletcher Assets pooled: £50bn


Funds: Global equities, fixed income, infrastruc- ture, private debt, private markets and multi asset


Partner funds: 32 London borough pension funds, including the City of London Corporation


16 | portfolio institutional | March 2022 | issue 111


Value has underperformed for 10 years, and we are seeing quite a severe reversal of late.


We need to have client demand before we launch a fund. We have to make sure that if they decide to invest in value, that we have a fund doing that. That could be a challenge. Typically, what will happen is that they will make up their mind and sud- denly ask: “Right, where’s our product?” And we reply: “This may take some time to set up.” We need to work together to antic- ipate what we might need in the future.


Does London CIV set a minimum threshold for investor commitments? Not as such, but there is an unwritten rule that if there is just a single client, that’s not pooling. We like to see at least two or three clients for a fund and, to get the economies of scale, £250m to £300m is our minimum. Yet there are some asset classes where you are not going to raise £300m immediately. We need to have the confidence that funds will see increasing client investments in the future as it is costly to set up and close funds over time.


That sounds a bit like selling groceries. Whenever you buy a product no one wants it, but when you don’t have it, everyone asks for it. “Yes, it’s a bit like demand- ing strawberries at Christ- mas. It takes them at least six months to grow and you cannot expect them in the middle of winter. But we try


to be pre-emptive and anticipate future demand. We have done this, for example, in private markets where we set up a renewables fund two years ago. A value fund is one of the things we may be look- ing into.


What is your outlook for the global economy?


As we come out of Covid, the outlook is reasonably good. There will be fits and starts but we are gradually moving in the right direction. Clearly, the challenge is what happens to inflation and interest rates. My view is that we are going to have to deal with elevated inflation for at least 12 months. The movement in interest rates is largely expected, but the key risk is what happens to bonds. Everyone is going to be chasing after inflation protec- tion. My worry is that it will take us a year to invest in it, by which time we will not want it anymore. At the same time, as a defined benefit scheme, we will always have to offer returns of inflation-plus 2% because wages are rise. To come back to a point I made earlier, while we have 32 clients, they all have the same pension plan and benefit require- ments. In the long run, that should be good for pooling. If you are a local govern- ment worker in Hackney or Greenwich, you have the same return requirement. So, our client funds should be aligned because they have to meet the same chal- lenge to meet benefit promises.”


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