The UK’s largest pension fund, the Universities Superannuation Scheme (USS), has created the role of head of research with the aim of improving its in-house equity investment process as part of a shift towards a more concentrated, “high-conviction” portfolio.
Peter Elwin has been appointed to the role, having started on 31 October.
His position spans the equities and responsible investment teams.
If his appointment proves successful, the role could be extended to take in public credit and private markets, according to Elizabeth Fernando, head of equities at USS.
Elwin joins USS from JP Morgan Cazenove, where he accumulated more than 19 years’ experience in equity research, valuation and accounting.
He was most recently deputy head of European research.
“Extracting him from there was quite a coup, really,” said Fernando.
She said Elwin’s role was to help the investment team “get better at the investment process”.
The idea is that this will boost returns at the £49.8bn (€63.4bn) scheme, which invests around £20bn in equities.
“The thinking,” Fernando told IPE, “is that, over the long term, we’ve added significant value for the scheme and our members by being an active manager. We think it’s about 70 basis points per annum over 10 years, which adds up to about £800m of additional returns to our members, which is pretty significant.
“But we can see that we were systematically leaving returns on the table.”
Fernando said there was too much focus in the industry in general on the outcome of investment decisions rather than the process leading to the decisions.
In a statement, she said: “The head of research will help each team member achieve the very best outcomes they can by facilitating objective discussions on what aspects of their process consistently add value, analysing what we could do or have done differently to improve our outcomes and ensuring we systematically implement each step in our process to the best of our ability.”
The hypothesis, she told IPE, is that, “if we have a good process and we execute it consistently, we’re much more likely to get good investment outcomes out of it, which will be incrementally positive to the returns to our members”.
The focus on an enhanced investment process and the associated creation of the head of research role are steps the scheme felt it could take as a long-term investor with substantial in-house expertise, according to Fernando.
“The market is like a treadmill, and that ability to stop and reflect just doesn’t exist unless you make it happen,” she said.
“I and the heads of portfolios were trying to do this, but we just weren’t creating enough space to do it properly, so we agreed that it would be helpful having someone whose sole job was to focus on that […].
“Because we’re longer-term investors, we should be able to carve out a bit of time that takes us off that treadmill of quarterly results.”
Upping conviction
The creation of the head of research role is part of new approach to equity investment at USS, under which it will run a more concentrated, fundamental, research-driven portfolio.
It carried out analysis at the end of 2015 that showed it would have added around 1% to its returns by only owning its largest overweight positions and skipping out on smaller overweight positions.
Fernando said: “Recycling that capital from low conviction back into high-conviction [positions] would have added probably another £100-odd million to member returns. At the end of the day, we’re here to make money for our members.”
The new focus on high-conviction equity investing will come via an organisational structure for fundamental, research-driven portfolios; the other part of USS’s equity allocation is in internally managed factor portfolios.
The fundamental, research-driven portfolios are split into a global emerging market portfolio and a global developed market portfolio, which has been the main target of the change in organisational structure and investment philosophy, according to Fernando.
“Within that global developed-market portfolio, we now have a single decision-maker for the [geographic] sleeves, whereas before some of the portfolios were run more in a committee-type format,” she said.
“The team supporting those portfolios and those decision-makers have each been allocated areas of responsibility so you make sure people are incentivised to do the best they can within their area, and they know exactly what is expected of them.”
The new investment approach was discussed with the equity team in late 2015 and “really came into place in earnest late February, early March”, she added.
Fernando said a timetable had been agreed with the board that gave its investment manager until December 2017 “to get us from the legacy state to the new state”.
The aim is that, by then, the global developed market portfolio will comprise around 120 stocks, whittled down from the 300-odd holdings in the legacy portfolio.
In a statement, Elwin said: “This is an exciting new role and really quite unique in the industry.
“It’s not just about validating recommendations but rather helping the portfolio managers and analysts develop a sophisticated understanding of the many different steps in the investment process and really make their investments work hard for the UK’s academic community.”
USS’s former deputy head of equities recently joined West Midlands Pension Fund, and Fernando said the scheme’s investment manager would not be directly replacing him.
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