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World poverty NAPF agenda

From the summary of a conference you can often gauge the significance of the issues discussed.
And the wrap-up by the UK National Association of Pension Funds’ (NAPF) investment committee chairman, Alan Rubenstein of Morgan Stanley Dean Whitter, at the NAPF Investment Conference 2000 in Eastbourne last month, neatly distilled the ‘action points’, which made tongues wag.
Rubenstein’s first thoughts were to the conference’s keynote address given by Clare Short MP, secretary of state for international development. She pointed out that many pension funds may not have considered the moral challenge of reducing third world poverty in the context of their business.
While acknowledging that pension fund assets must be managed: “in the best interests of shareholders” with the traditional emphasis on returns, Short also suggested that in an environment of rising stock and bond prices and yields due to increasing demand from an ageing society, responsible investment in developing countries could prove to be a win-win initiative.
“There are potential benefits for
you as well, for example in terms of
growth of markets or diversification of portfolios and spread of risk,” remarked Short. “Pension funds could provide the type of sustainable, long-term investment which would assist development, unlike the short-term highly volatile flows which can destabilise banks or large firms, upset exchange rate regimes or wreak havoc with the economy.”
Rubenstein said he was delightd to find the NAPR and the government singing from the same hymn sheet. He also applauded the unveiling of the UK version of GIPS (Global Investment Performance Standards), termed UKIPS, before the conference, adding: “I hope that when we come back here next year, UKIPS compliance, or at least working towards it for those unable to adopt it immediately will be the norm.”
Peter Derrick of the Corporation of London pension fund, pointed to the small number of players advising local authority schemes, with 92 of the 98 funds using either Hymans Robertson, Watson Wyatt or William M Mercer.
Accepting that all three are “Substantial houses with solid track records,” Derrick nonetheless asked whether this market cocoon constituted an “imaginative business” and suggested it created barriers for some asset managers into the local pension fund authority market.
Investment performance for the local authorities, he noted, lagged the investment universe for private sector pension funds, pointing to an underperformance of 1% annualised over three years, or the equivalent of £1bn in lost business per annum. “The result means that we have had to cut services or put in council tax rises,” he said.
In response, Don Ezra, director of European consulting at Frank Russell, urged consultants to start maintaining records: “In the knowledge that they will be audited and used as past performance.” He urged trustees and consultants to take the respective blame for shortfalls in the past and called for funds to implement a set of qualitative criteria to judge consultants on their work.
“Be flexible though and see how it works, refine it if needs be and then we will see this move into mainstream practice. This is the third year in a row that this question has been brought up, now let’s see some action.”
A further set of speeches under the title ‘assets in action’, saw Geoff Singleton, consultant at Hymans Robertson and Anthony Simpson, managing director at Mercury Asset Management (MAM), pointed to possible income sources that UK pension funds currently overlook, which have become commonplace in the US.
In a speech on commission recapture, Singleton pointed out that a fund of £200m with a 50% turnover using a third-party to manage its programme could save £18,000 per annum – around one basis point.
“There is the real prospect of hard cash – not huge amounts – but real nonetheless,” Singleton noted. However, he emphasised that any arrangement should not jeopardise manager relationships if they were to work well.
Simpson at MAM advocated the use of liquidity funds for investors seeking to enhance cash yields through what he now noted was a $1.6trn business in the US, with more cash than deposited assets in the US banking system.
“These funds are safety oriented with a diversification of rated investments and carry AAA Moodys and S&P ratings. They are also very liquid with late dealing deadlines and no penalties for size.”
Alistair Ross Goobey, chief executive at Hermes Pensions Management warned pension funds to be careful investing in what he deemed a worthwhile but verbose sector: “There is a lot of confusion between high gearing, a bull market and genius. If I had geared my quoted equity portfolios in the way that most MBO funds gear their investment, the quoted equity portfolios would have beaten private equity out of sight.”
And in a broadside to the private equity community over criticism from the BVCA (British Venture Capital Association) that pension funds were not allocating sufficient assets to venture capital, he added: “Yes, I believe you have an important role to play, but please don’t exaggerate your achievements. It is still difficult to separate out the hype and the hubris from the value added, and in my experience, insulting potential clients is not usually the brightest way of making them sign up.”

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