The Hounslow Pension Fund is tendering a multi-asset mandate worth up to 15% of its assets under management, in an attempt to improve cashflow and investment return.
The UK local authority fund – which had assets of £762m (€964m) at the end of February, largely managed by Aberdeen Asset Management and BlackRock – said it was looking to appoint a single manager to a long-running multi-asset income mandate, which should aim to return at least 4% per year.
In the tender notice, Hounslow said the return should be achieved through a “diverse” set of assets, including equities, fixed income and property holdings, with an initial allocation of £75m-100m.
It added that all currency exposure should be hedged back into sterling but that, otherwise, use of derivatives should be kept below 10% of risk capital when measured by value at risk.
“In addition, there is a liquidity requirement such that, under normal market conditions, 70% of the assets can be realised within one day, 20% within one week and 10% within one month,” the tender added.
The investment management agreement, which Hounslow hopes to have in place by the beginning of September, could run for an initial term of seven years, with further extensions doubling the initial contract length.
Hounslow hopes to see interest from at least five fund managers, all of which are asked to answer the request for proposal by 18 April.
The tender comes after the fund’s pensions committee conducted a review of its investment strategy to address its investment performance and a potential cash deficit, according to a report prepared by the fund’s chair Mukesh Malhotra for a committee meeting on 24 March.
The fund achieved an 11.2% return during the 2014-15 financial year, more than 2 percentage points below its benchmark but, at 8.8%, tied with its benchmark over a five-year period and outperformed by more than 1 percentage point over the last decade, achieving an annualised return of 9.1%.
The fund’s investments are largely managed by Aberdeen and BlackRock, responsible for 41.9% and 51.7% of assets, respectively, as of the end of March last year.
A further £40.9m in assets were split across property mandates manages by Threadneedle and CBRE, with a small holding managed by the Local Authorities Mutual Investment Trust.
The fund’s remaining £8m is invested in private equity.
Both main managers have underperformed their benchmarks over the last year, three years and five years, although BlackRock achieved a 1.3% annualised benchmark outperformance over a 10-year period, and Aberdeen a 0.9% outperformance over the same period.
In his report to the pensions committee, Malhotra said: “The intention is for the yield from this portfolio to cover the cash shortfall of the fund as pensions in payment continue to outgrow employee and employer contributions into the fund.”
It added that the portfolio would “at a minimum” include the three asset classes mentioned in the tender, and that its size could grow to £116m, based on the current predicted growth of the local authority fund.
Hounslow hired Allenbridge to advise it on the eventual appointment of the multi-asset fund manager.