UK local authority pension pools building up internal management capacity must be conscious of the risk of teams underperforming and failing to meet targets.
Ian Barnes, head of UK and Ireland at UBS Global Asset Management, said new internal teams at a number of the eight pension pools to be formed by English and Welsh local authority funds would struggle as much as the asset management industry in their quest for alpha.
Barnes also rejected the suggestion the new asset pools would shift from using asset managers for conventional mandates, such as global equity and government bonds.
Speaking as UBS published its latest Pension Fund Indicator report, he told IPE the asset management industry remained strong, although he acknowledged that it faced growing competition for LGPS assets as the pools started undertaking joint procurement exercises to consolidate mandates, or shifted management in-house.
“If they do decide to internalise and run money actively, just as many will fail in doing that as external active managers would fail,” he said.
Barnes predicted there would be a “natural balance” between outsourcing and in-sourcing, as pension funds able to find and retain good staff achieved lower management costs due to individual pools’ approach as not-for-profit entities.
“But a lot of internal teams will fail and deliver underperformance – and it won’t really matter how cheap they are if they are under-performing,” he said.
However, despite the growing competition for LGPS assets, where UBS currently has 30 clients, including the UK’s largest, the Greater Manchester Pension Fund, Barnes predicted asset managers would continue to see interest from the local authority sector.
He said managers only offering one asset class well would continue to benefit, as “quality will really shine through for them”.
Barnes added: “Multi-asset managers, they will be able to strongly argue for the governance advantages of coming to one house for multiple asset classes, and that’s where the growth of houses like ours will come from.”
A number of emerging pools, including the Local Pensions Partnership and the Northern pool, comprising GMPF, West Yorkshire Pension Fund and Merseyside Pension Fund, have said they wish to grow their internal management capability gradually.
Additionally, the Border to Coast Pensions Partnership comprises a number of funds already managing assets in-house and is expected to further grow its capabilities in an effort to reduce management costs.