For the past two months, a document has sat on the home page of the London Pension Fund Authority (LPFA) which would be the envy of many of its fellow defined benefit schemes. The document is simply, unequivocally headlined: “Your Pension Is Safe”.
While corporations around the world fret about the carnage on equity markets and what it means for their bottom lines, the LPFA investment team can operate in the luxury that its beneficiaries are protected by statutory guarantees, and that only its council employer’s contribution rates are able to change over its 30 to 40 year time horizon.
This doesn’t mean that Vanessa James, who became the LPFA’s investment director in March 2007, isn’t searching for ways to exploit the opportunities presented.
“We’re not sitting here complacently,” she says. “That being said, we haven’t changed our belief that global equities will outperform bonds and cash in the long term…What this crisis has probably reminded everybody of is the importance of transparency, knowing who your counterparties are, and really understanding everything you’ve got.”
That means a foray into hedge funds is not being considered “for the moment”, but big hopes are being held for a new investment in a global property fund-of-funds from ING Real Estate.
James committed 150 million pounds (US230 million) to the vehicle in July, after talks about a discrete global property mandate morphed into the LPFA becoming seed investor for the open-ended, global, balanced vehicle known as the Osiris Property Fund.
The move coincided with the LPFA getting “all but out of UK property” before that particular market started its precipitous slump.
The Osiris managers have largely held fire so far, which does not bother James because property markets around the world only continue to get cheaper for those lucky enough to be cashed up.
The timing of the global property commitment is not the only stroke of luck the LPFA has welcomed of late.
James reveals that one of the fund’s ‘target return’ managers – which essentially run dynamic asset allocation portfolios with long-term inflation-plus targets – was terminated earlier in the year, leaving the LPFA’s Active Sub-Fund (whose members are still in the workforce) sitting on a big lump of precious cash.
The LPFA deployed some of that in October, investing 25 million pounds in European corporate credit which James told Reuters at the time had been “so badly dealt” it was too cheap to pass up.
James now says the October timing of that investment was “interesting” and that credit spreads have only gotten cheaper since, but that’s of little matter to a long-term investor.
Asked for her investment advice to peer funds around the world, James actually nominates European credit as the place CIOs should be looking, and not just to provide liquidity for LPFA’s own investment.
“We have 700 different names in our credit portfolio and less than two have defaulted,” she says, pointing out that credit markets are pricing in a level of defaults akin to the Great Depression.
“We think the Government here and governments around the world will do enough…we’re not planning for a Japan in the 1990s.”
If the Depression scenario does not eventuate, then corporate credit markets are currently the only place where double-digit rates of return are to be had for very conservative levels of risk.
James does not think equity markets have reached that point yet, and is in fact considering averaging down the LPFA’s exposure.
True to its local council roots, the LPFA investment team continues to think essential infrastructure is a sensible place to put its money, especially where governments are involved.
It is a co-investor with the Victorian Funds Management Corporation, among others, in a Trillium Public-Private Partnership pooled fund.
Another investment strategy working well for the LPFA is the recent decision to switch its Pensioner Sub-Fund out of index-linked gilts (inflation-linked bonds) and in to cashflow-matching, ‘liability driven’ investments (topped up with some global equity).
Given the low inflation era ahead, James was confident that the liability-matching strategy would be a better deal for the LPFA’s pensioner members
