Lothian moves more equities in-house to make efficiency savings
UK - The £3.2bn (€3.9bn) Lothian Pension Fund has reduced its equity managers by four as it starts to increase the in-house management of its assets.
The move comes as part of its revised investment strategy and will save almost £1m in external management fees, officials said.
Documentation from the latest pensions and trusts committee meeting of Edinburgh City Council confirmed the European equity portfolio managed by Axa and the US portfolio run by Goldman Sachs were terminated in September 2009 and January 2010, respectively.
The assets were placed temporarily with State Street, one of the fund’s transition managers, on a segregated, low-risk passive basis.
In addition, the global equity mandate held by Wellington was terminated in February, while the UK portfolio run by Martin Currie was ended in March, with these assets currently held by Legal & General in pooled passive funds.
Last year, the council approved a new investment strategy that will reduce the equity allocation from 66% in UK and mixed equities to 15% in UK equities and 45% in global, while bond investments will be reduced to 5% and alternatives increased from 24% to 35% of total assets. (See earlier IPE article: Lothian focuses on alternatives in new strategy)
However, these are long-term aims, and a spokeswoman for the pension fund noted that alternatives include assets such as infrastructure, property and private equity that are not easily built up.
As opportunities become available, the fund will “draw down” on the assets held by State Street and L&G, selling these equities to finance the alternatives portfolio.
She also said there would be no search for any external managers to replace the four that have been terminated, as by allowing these assets to be managed by the in-house team the pension fund could save around £900,000 per year in external management fees.
The annual monitoring report of the Lothian pension fund stated: “As the new strategy involves a reduced allocation to equities, the Investment Strategy Panel has reviewed the efficiency of the structure with regard to the number and style of managers.”
Therefore, in the future, 30% of the equity allocation - the “low-risk” or core UK, Europe, and US portfolios - will be managed in-house, while the “higher risk” or satellite portfolios of Asia Pacific, emerging markets, global and special situations will be managed externally.
The report noted the Asia Pacific portfolio was currently run by Baillie Gifford, although this mandate is due to expire shortly, while Lazard holds a global mandate and Aberdeen Asset Managers run the emerging markets portfolio.
It added that a global mandate currently managed by Franklin Templeton would be re-tendered.
Lothian Pension Fund confirmed the in-house team currently manages 35% of the pension fund in-house, but the changes will see an additional 20% of the fund invested in US and European equities move from external managers to internal management.
Three additional members of staff will be recruited to assist with the management of funds in-house.
Geik Drever, head of Lothian Pension Fund, said: “We are making changes to the way our team works, and as part of this, we are enhancing the in-house investment team to manage more of the lower-risk investments.
“There is still a place for external fund management - however, fees make up a significant cost for the fund, so it is important we address this area, too.”