DATE Brunel: an overview for fund managers Brunel Pension Partnership Ltd
Contents Our values Our investment principles Investment views Investment approach Search processes Fund structures, costs Responsible investment Portfolios Next steps 2
Introduction We are rapidly developing So while this aims to provide you with our current views.. Almost anything could change! This content is produced by Brunel Pension Partnership Limited. It is for the exclusive use of the recipient and is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or jurisdiction where distribution, publication, availability or use of this document would be contrary to law or regulation. This content is provided for information purposes only and does not constitute an offer or a recommendation to buy or sell securities or financial instruments. It is not intended to be a substitute for the full documentation of the portfolios. Updated January 2018 3
Brunel Pension Partnership Key numbers 10 Shareholder/Client LGPS Funds 28bn of assets ~700,000 scheme members 24 investment portfolios to build asset allocation The primary objective of Brunel Pension Partnership Ltd is to enable each Fund to deliver its fiduciary duty to act in the best long-term interests of its members. 4
Factors for success: 1 Client-focused Our clients are at the heart of everything we do Our team is dedicated to helping our clients meet their investment objectives We are guided by strong governance and a clear investment process Our Clients benefit through Confidence in a team dedicated to helping them progress toward their objectives 5
Factors for success: 2 An investment partner you can trust We champion open and transparent communication with our clients and our peers We are innovative and forward-thinking with investment solutions We have a passion for the industry and are keen contributors to it Our Clients benefit through Clear understanding of where they are and of their future investment needs aligned to your interests 6
Factors for success: 3 A team of experts We value transparency, honesty and excellence We believe in responsible citizenship and service to our community We have over 300 years of combined experience in investments and sustainable finance Our clients benefit through Advice they can trust from a team that cares about their objectives and values 7
Our values We believe in making long-term, sustainable investments supported by robust and transparent processes We are here to protect the interests of our clients and their members In collaboration with all our stakeholders we are forging better futures by investing for a world worth living in 8
Our Investment Principles We have developed 12 core investment principles. These are intended to provide the framework for the investment structuring, operations, manager selection, monitoring and reporting. The principles are also designed to meet the Department for Communities and Local Government s Local Government Pension Scheme: Investment Reform Criteria and Guidance and the requirements and expectations of Financial Conduct Authority. They can be applied to all asset classes, although the detail of operation will vary by asset class They do not impose any restrictions on type, nature of companies or assets held within the Portfolios. They do place an expectation that recognised best practice standards in governance, risk management, stewardship and value for money will be delivered. 9
The 12 Investment Principles in Brief Long-term investors Responsible investors Best practice governance Decisions informed through expertise Evidence and research Leadership and innovation Right risk for right return Full risk evaluation Responsible stewardship Cost effective solutions Transparent and accountable Collaboration 10
Investment Views Understanding real risks for us Liabilities and contributions Not tracking error Hard to diversify the big risks Long-term economic growth But can we help grow the pie? Caution on over-engineering Light use of derivatives 11
Investment Views II Being long-term is our strength Patience, sometimes holding our view Responsible Investment Active management can work: Focused, high-conviction approaches Systematic factor/risk-based approaches Caution over market timing/trading 12
What makes a good manager? Clarity of philosophy/thesis Clear, consistent process Appropriate focus on risk: financial, operational, regulatory, reputational, ESG Cultural indicators Constant improvement Challenging self and others Genuine diversity Enthusiasm Past performance: an indicator 13
Building Partnerships Good long-term relationship Clear expectations Understand each other's needs Avoid creating false pressures If needed, work on internal change Changing managers is hard work Communication and transparency Covenant 14
Investment approach Brunel to establish c.25 portfolios Formal or Informal collective vehicles Objective-based Clients set asset allocation Using these portfolios Brunel implements these portfolios External managers 1 to 5 managers per portfolio Brunel monitors/maintains portfolios 15
Our Portfolios Bonds Equities Alternatives PASSIVE IL Gilts Leveraged IL Gilts Conventional gilts? Corporate Bonds Multi Sector Credit Global Bonds Dynamic bonds? Developed Emerging markets Smart Beta Low Carbon UK Global High Alpha Global Core Sustainable Low Volatility Smaller Companies UK Emerging Markets PRIVATE MARKETS Property Infrastructure Secured Income Private debt Private Equity DGFs Hedge funds 16
Getting there FCA authorisation: Q1 2018 expected MiFID firm, clients opted up Don t forget MiFID II, GDPR & SMR Currently: New office Custody transition Developing internal processes 2-year portfolio transition program Each portfolio will take 2-6 months Appropriate and transparent selection processes 17
Selection Processes Most appropriate approach Balance Key principles: fair, transparent 18
Search Timetable Market Research Search announced Prepare EOI EOI Evaluation Prepare Tender Tender Evaluation DD Decision Negotiation & Agreement 1 Month Transition 19
Responding to tenders Expectations increasing Exam technique: RTQ Follow all the instructions Clarity cannot be over-emphasised Avoid clichés and waffle Honesty and reality are good Don t let your RFP department standardise it 20
Investment Structures Looking to use pooled vehicles: For passive mandates Use manager s own vehicles Low cost, crossing opportunities For active listed equities: Looking to establish and run our own structure For managers, essentially means a segregated mandate (or low cost pooled structures, especially for certain areas) Low-cost, tax-efficient, control of governance etc. For fixed income / alternative assets Further research needed Manager operated fund or our own structure? Private markets: further information to follow 21
Points to note Will be acting as an agent for our clients Managers should be content with our opt-up (COBS 2.4) IMA (with our structure) or side letters Full transparency with our custodian look through Managing transition costs critical In specie transfers Overlap with existing portfolios Flexibility on holdings, timings etc. Manager ideas encouraged 22
Costs Costs are very important! We will be seeking scale savings Full transparency Brunel has signed up to LGPS Transparency Code, and expects similar from managers Total cost assessment: Management fees All fund fees, tax drag if relevant Expected transaction costs Transition costs (amortised) 23
Costs cont d What can you do? Flexible fee schedules Avoiding inconsistencies LGPS fee rates? Innovation! Suggestion on approaches that would help keep fees low (quantified!) Update us on fund costs (and recommended structures) 24
Performance fees Cautious on performance fees Depends on details: How much are savings on downside? Breakeven point? Capacity management Technical details are important Proper benchmarks High watermark, rebates, etc. 25
Responsible Investment Important consideration All managers should be 'responsible' Stewardship and good governance Integrate ESG risks Looking for reporting and analysis Carbon footprinting Governance and other issues Impact: Sustainable Development Goals Working with our custodian on tools 26
DATE The Portfolios November 2017
Passive portfolios A single index tracking manager Allocations: Developed market equities 1,600m Emerging market equities 200m UK equity 1,500m Smart beta equity 1,200m (composite benchmark) Low carbon equity 550m IL gilts & Leveraged IL Gilts up to 2,000m Support for new funds and indices Strong stewardship critical 28
Core global equities Risk-controlled alpha Modest style biases (mostly positive) Standard global equity benchmark (incl EM) 1-2% p.a. outperformance target Est 1,300m Probably 2 primary managers With complementary approaches Low to moderate total cost 29
High alpha equities Excess returns from the leading managers High conviction, unconstrained portfolios Long term and with flexibility Material style biases expected Standard developed market equities benchmark some emerging markets exposure may be allowed. 2-3%+ per annum over a rolling 3-5 year period Est: 2,100m Up to 5 managers Range of approaches / styles, etc. Net of fees performance 30
Sustainable global equities Global sustainable equities Excess returns from manager skill and ESG considerations Strategic, long term consideration of environmental and social sustainability Going beyond standard Responsible Investment Standard global equity benchmark (incl EM) 2%+ p.a. outperformance target ~ 850m Up to 5 primary managers Some specialist, some more general 31
Low volatility global equities Reduced risk, with market returns plus some manager skill Through portfolio construction and stock selection Active approach to manage other biases/factors (systematic?) Long term: standard global equity benchmark (incl EM) A low volatility index may be used as a secondary benchmark, Outperform with lower volatility (80% or less) Especially protecting value in falling markets Allocation of 740m 2 underlying managers 32
Smaller company equities Benefit from smaller companies effect and manager skill Flexible mandate, selective approach Quality and/or growth slant? Governance a key consideration Global smaller companies equity benchmark (excl EM) 2% per annum over a rolling 3-5 year period Allocation of 350m Up to 3 primary managers Probably regional specialists 33
UK equities Unconstrained approach Tilt towards smaller companies exposure expected Manager diversification a key consideration Sector or thematic specialists? Leading stewardship essential Interested in alternative UK benchmark Which is less concentrated / better balanced More reflective of the UK economy 2% per annum outperformance target Allocation of 1,200m Probably 2 managers 34
Emerging market equities Wide ranging mandates Include a small element of frontier markets Absolute return mindset likely to be preferred Risk and ESG control important 2-3% per annum outperformance target Allocation of 1,100m 2 to 3 managers Possibly an additional manager for frontier markets Seeking a complementary range of approaches 35
Diversified growth funds Provide a broad exposure to a range of return drivers and diversification from equity risk Range of manager approaches Dynamic allocation Performance target GBP 3 Month LIBOR + 4.5%, "equity like returns at ½ to 2/3rds equity risk" Allocation of 1,600m 2 to 4 managers 36
Hedge funds Uncorrelated investments to deliver a steady absolute return, low absolute risk and volatility Multiple hedge fund strategies with multi-manager solution Performance target GBP 3 Month LIBOR + 4.5% Allocation of 400m Probably 1 multi-manager 37
Sterling corporate bonds Focus on credit research as the way to add value Positive exposure to credit risks compared to the benchmarks Iboxx non-gilt benchmark or similar broad index +1% per annum performance target Allocation of 1,900m 2 to 3 managers 38
Global bonds Active management approach Global bond benchmark hedged Time for a smarter benchmark? + 0.5-1% per annum performance target Allocation of 600m Up to 2 managers 39
Multi asset credit Diversified portfolio of credit opportunities with reduced exposure to interest rate risk Tactical allocation skills Composite benchmark 1-2% per annum outperformance target Allocation of 590m 2 to 3 managers 40
Private markets c. 5bn allocation to private markets Property Infrastructure Private Equity Private Debt Secured Income Approach to be determined as we build up team Legacy holdings and changing allocations are key issues 41
Private markets cont d Area of real opportunities More direct investing Co-investments Bespoke funds Partnerships Collaboration Targeted opportunities Team will be built up early 2018 42
Indicative Timetable 43
Next Steps for managers Get in touch by email: Register interest in portfolios (be specific) Newsletters, quarterly reports, product updates Strategic analysis and research New opportunities to investments.brunel@brunelpp.org or PMinvestments.brunel@brunelpp.org for private markets Copy existing client communication to Brunel Contact client or us for instructions Sign up on website for updates 44
Fund manager relationships during transition Patience! We may not respond immediately but your interest will be noted Team members may attend relevant manager events as appropriate (particularly in Bristol!) Direct dialogue (including meetings) will usually start when we begin relevant market research for each portfolio We look forward to working together! 45