Liam Kennedy asks Paul Trickett about the progress the Railpen Investments board is making in changing the way it invests
It takes guts to abolish yourself. But that is what the Railpen investment committee effectively did last year when the fund created a new investment board and delegated authority to the in-house executive management team.
Paul Trickett, formerly EMEA head of investments at Towers Watson and CEO of the Coal Pension Scheme, was appointed chairman of the board of Railpen Investments in April last year. Under his chairmanship it is continuing an investment transformation programme that started in 2013.
The investment committee, as with other similar bodies, was created for a different age. The in-house investment team of Railpen Investments had little freedom because every change had to be presented to the investment committee. But the increasing level of complexity of the proposals meant the committee was often uncomfortable making decisions and would either take its time or send the proposals back to the in-house executive team.
“Over time, that led to a situation where both parties, despite having the same objectives, felt a constant sense of frustration with one another, and the relationship was weakened, so no-one was happy,” says Trickett. On a day-to-day level, the Railpen Investments board now has considerable authority to vary asset allocation within the strategic plan, and in-house investment staff have more authority to make investment decisions themselves.
The board is deliberately small as it believes smaller groups are more effective at decision making (see Railpen Investments’ board members). Two trustees are members, as well as Chris Hitchen, CEO of RPMI, the administration and executive function. There are two external members, including Angelien Kemna, chief finance and risk officer at APG, and Karl Sternberg, former CIO of Deutsche Asset Management and founder of Oxford Investment Partners.
Railways Pension Scheme key facts
• Assets: £21bn (€30bn)
• Locations: Darlington, Coventry and London
• 111 scheme sections
• 175 employers
• Five pooled funds
The first challenge was to create a set of investment beliefs – work which has now been completed (see Railpen’s investment beliefs). “The beliefs are fundamental,” notes Trickett. “We take every opportunity we can to reiterate the beliefs. We write them down and we hang them up on the wall in the office.”
The board meets six times a year to discuss strategy for the schemes’ pooled funds, but holds additional strategy days and ad hoc meetings.
Other work has involved the introduction of a new set of pooled funds, changing the asset allocation structure of the existing pooled funds and completely restructuring the management arrangements with a target of reducing the number of external providers. The RIB has the responsibility for preparing the plan and submitting it to the trustees for approval.
This year there has been work to restructure the Growth fund and to move equity allocations to alternative risk premia. This was scheduled for completion by the end of June. Work has also started on two new pooled funds – Illiquid Growth and Long-term Income.
Trickett is realistic about the growth trajectory of the Long-term Income fund. “Low volatility and secure cashflow is very popular among pension schemes, so I suggest it will not be a big fund by the end of this year. But we will be looking at how we will be able to source investments.”
The Illiquid Growth fund will involve investment in private markets for which the Railpen Investment board must formulate a strategy.
“That does not mean we want the same kind of private market capability as previously, where we just paid managers a huge amount of money for very little apparent benefit,” says Trickett. “Obviously our private market commitments will be seen through to fruition but we are taking a fresh look at the type of private market exposure we have.”
Future private markets investments are likely to be more targeted in terms of sectors and involve co-investments rather than just funds. A private markets investment committee has the authority to commit capital quickly as opportunities arise, and is purely staffed by Railpen Investments’ full-time staff.
“One of our problems is that we need to build knowledge within particular sectors,” says Trickett. “We are not going to be the lead on a big deal, so we are trying to find originators who will have access to better deals than us. Perhaps slowly over the years we will build the relationships and a reputation that enables people to come to us direct.”
Railpen Investments has also undertaken to reduce external management fee commitments by around a third overall and is already working towards that goal. The board determined that many fee structures we are too opaque and now conducts a value-chain analysis on every new relationship. If it does not expect to achieve 50% of the value-add, it will not invest. Trickett accepts that 50% is not a very aggressive target but recognises that in many cases the fee structure delivers most additional value to the manager.
Railpen Investments’ board members
• Paul Trickett – chairman
• Chris Hitchen – CEO of RPMI
• Karl Sternberg – independent director
• Angelien Kemna – independent director
• Peter Stanyer – independent director
• Richard Goldson – trustee director
• John Mayfield – trustee director
(As at end of February 2015)
Railpen Investments’ pooled funds
• Illiquid growth
• Liability platform
• Long-term income
• Passive equity
Railpen has also significantly reduced the number of active managers it uses. “From our point of view, there were too many relationships to manage,” says Trickett. “If we want to be actively engaged with our managers and truly understand what they are doing we can’t do that across 50-odd managers.” The board has also already divested most of its hedge fund exposure.
The board is contemplating moving resources in house, but this is more likely to involve managing the 25% portion of the equities exposure internally, perhaps with a concentrated, long-term buy-and-hold approach. Building up expertise in private markets is unlikely.
Before making a decision about boosting in-house management, the Railpen Investments board wants to satisfy itself that it has created “a sufficiently strong investment culture that is going to attract people who are going to come and stay with us,” says Trickett. “That is not proven yet”.
How will the new investment board be assessed? The presence of two trustee directors acts as an internal control mechanism and they ensure the board is fulfilling its role correctly. In addition, the board reports to the trustees after every meeting and is responsible regarding clear investment performance targets.
“We have been lucky so far in that markets have been kind and there have been no major problems,” concludes Trickett. “The real test is going to be when there is a major issue and things start to look bad. We do not have tenure and should not have. If we lose the confidence of the trustees they have the perfect right to replace us.”
And underpinning the new structure is a sense of reality. Railpen might be large in the UK but it is not in global terms. “We don’t think of ourselves as being big,” concludes Trickett. “We are about the 150th in the world in terms of size and that brings quite a lot of restraints as to what we can do. So we are more conscious of that position than we are of being a big UK pension scheme.”
Railpen’s investment beliefs
1. We value effective governance, leadership and strong culture as essential for a world-class investor.
2. We work to clear investment goals and accountabilities to meet our liabilities.
3. We act as long-term investor.
4. Price matters so we will be patient but ready to act.
5. We believe diversification usually reduces risk more than return.
6. In managing risk we recognise it is multi-faceted and not fully quantifiable.
7. We manage environmental, social and governance issues as they can have an impact on the long-term performance of investments.
8. We seek to achieve alignment of interests between ourselves, our beneficiaries and those acting on our behalf.
9. We believe that costs matter and can be managed.
10. We believe that the best investment solutions for most Sections is through a small number of distinct multi-asset funds, which enables flexible decision making.