Keeping On Track

Judge’s comment: “A no-nonsense fund with solid performance, making full use of solid investment tools and best-practice methods combined with low costs.”

The West Midlands Pension Fund is a UK local government pension scheme that provides pension services to current and former employees in its region. It is the second largest fund in England and Wales of its kind with more than 275,000 members and assets of over £11bn (€15.8bn).

A diversified portfolio of assets consisting of equities, fixed income and alternatives is managed primarily by an in-house team of investment professionals. The fund pursues a return-seeking strategy and strives to meet high standards of performance, governance and compliance, while ensuring the cost per member reduces year on year. 

The fund’s passive UK and overseas equities portfolios are managed in-house by several portfolio managers. These comprise five regional index funds for the UK, North America, Europe-ex UK, Japan and Pacific-ex Japan. Within the UK, the in-house index fund is designed to track the FTSE 350 index. This is combined with an investment in a UK small-cap fund managed by Legal and General Investment Managers with an approximate value of £36m.

These two portfolios are then combined to allow performance to be calculated against the FTSE All Share benchmark. In addition to the internally managed index funds, West Midlands Pension Fund has a £271m allocation to a global-ex UK index fund managed by BlackRock. This was set up in December 2014 to enhance global stock market exposure and to complement the scheme’s existing internal and externally managed active mandates.

West Midlands Pension Fund’s asset allocation is reviewed and discussed at regular intervals by the portfolio management team. The individual allocation levels for each portfolio are compared against their respective target allocation. If a portfolio allocation has moved away from its target due to investment activity or market movements, a decision is taken as to whether this should be corrected or simply monitored for a while, taking into account market conditions as well as overall fund activity. If a decision is taken to return the allocation nearer to its target, then the portfolio manager will implement a trading strategy to implement this in a timely manner.

Portfolio risk is monitored frequently to ensure that any small deviations from the benchmark do not have a negative impact on overall performance. Tracking error for each of the portfolios is calculated and monitored using the Barra multi-factor modelling tool to ensure that overall risk is kept under control. The tracking error within the UK portfolio is generally higher than the other regional index funds. This is largely due to West Midlands Pension Fund’s holding in Royal Dutch Shell shares, where its overweight B and underweight A shares.

Managing more than £3bn of its assets internally allows the fund to make substantial cost savings. Its in-house passive investment management function costs less than 3bps at present, which is less than half the cost it would incur if it outsourced the mandates.

While the portfolios are not designed to generate alpha, careful management of corporate events and index changes are two of the methods West Midlands Pension Fund employs to create added value and reduce the overall cost of managing the portfolio. In addition, all of the in-house portfolios generate stocklending income.

The scheme employs a team of four investment professionals to run its passive portfolios. The team comprises a portfolio manager, assistant portfolio manager and investment analysts who have a combined experience of more than 40 years and who are responsible for all analysis and research, rebalancing, trading and execution of market orders.

Finally, the fund will continue to research and consider smart-beta strategies to see if they could be beneficial and complement the existing in-house passive capability.

Essentials to March 31 2015

West Midlands Pension Fund

United Kingdom

Founded in 1974

Defined benefit public sector fund


  • active: 104,250
  • retirees: 82,110
  • deferred: 91,198

Assets: €15.8bn


  • one year: 15.1%
  • three years: 10.3%
  • five years: 8.1%
  • ten years: 7.9%

Quick facts

  • In-house passive team investing in five regional index funds
  • Frequent monitoring and tracking errors ensure minimum deviation from target
  • Internal management cost of 3bps is less than half outsourced equivalent
  • Short-listed
  • Fondo Pensioni del Personale Gruppo BNL/BNP Paribas Italia Italy
  • FRR France


  • Ger Goris
  • Felix Kottmann
  • Neil McPherson
  • Nick Motson