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Asset management and stewardship

Asset management

The custody of the majority of LGPS funds assets was undertaken by the following four investment banks - Northern Trust, State Street, BNY Mellon and JP Morgan.
During 2014 a national EU procurement exercise was carried out to ensure LGPS funds secure a very high quality secure, efficient and value for money service from these custodians.

Stewardship and responsible investment

Collectively the £192bn LGPS funds are one of the largest 10 global sources of capital and can influence behavioural changes that lead to better stewardship by the global asset management community and the entities and places they invest in.

All LGPS funds have published their Statement of Investment Principles and compliance with the Myners Principles as these are LGPS statutory requirements.

The UK Stewardship Code (second edition 2012) and global United Nations Principles of Responsible Investment (UNPRI) set out key principles of effective stewardship for asset owners to help them better to exercise their stewardship responsibilities.

Compliance with these UK and global sets of principles is not mandatory for LGPS funds but they have the support of the UK Government and Local Authority Pension Fund Forum (LAPFF).

As at 31st March 2014 some 18 (20%) were signatories to the Code and funds (8%) signatories to the UNPRI (see table below).

Six LGPS funds were named and ranked in the top 500 of the worlds institutional investors for taking account of climate change risk in their investments in the 2014 annual survey by the global 'Asset Owners Disclosure Project’. They were Environment Agency 5th, Norfolk 36th, Merseyside 63rd, West Midland 74th, West Yorkshire 133rd, and Greater Manchester 138th.

 

Signatory to UK Stewardship Code

Signatory to UNPRI

Avon (BANES) yes  
Bedfordshire yes  
East Riding yes  
Environment Agency yes yes
Greater Manchester yes yes
Gywnedd yes  
Lancashire yes yes
Lincolnshire yes  
LB Bexley yes  
LB Ealing yes  
LB Haringey   yes
LB Hillingdon yes  
London Pension Fund Authority yes yes
Merseyside yes yes
Somerset yes  
Tyne and Wear yes  
Warwickshire yes  
West Midlands yes yes
Wiltshire yes  

 

Investment allocation

Change in allocation chart based on aggregated Net Asset Statements year to 31 March 2014

Investment Assets 20132014Change
Fixed interest securities 6.7% 5.5% -1.2%
Index-linked securities 2.8% 2.4% -0.4%
Equities 38.4% 38.5% 0.2%
PIVs 40.8% 41.1% 0.3%
Property PIVs 3.4% 4.1% 0.7%
Property 2.4% 2.6% 0.0%
Private equity 1.9% 1.9% 0.1%
Derivatives 0.1% 0.1% 0.0%
Other 0.7% 1.9% 0.0%
Other balances 0.5% 0.6% 0.1%
Cash deposits 2.3% 2.4% 0.1%
Total   100.0% 100.0% 100.0%
 
 
Change in allocation chart image
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Asset allocation charts based on aggregated Net Asset Statements as at 31 March 2014

Asset classAsset type £000s%£000s%
Fixed interest Fixed interest UK 7,008,315 3.7% 10,613,992 5.5%
  Fixed interest Overseas 3,605,677 1.9%    
Index-linked Index-linked UK (where stated) 3,947,876 2.1% 4,623,994 2.4%
  Index-linked Overseas 676,118 0.4%    
Equities Equities UK 33,907,389 17.7% 73,739,535 38.5%
  Equities Overseas 39,832,146 20.8%    
PIVs   78,702,895 41.1% 78,702,895 41.1%
Property Property PIVs 7,834,337 4.1% 12,715,814 6.6%
  Property (Direct investment) 4,881,477 2.6%    
Other   10,936,038 5.7% 10,936,038 5.7%
Total         191,332,268 100.0%

Total asset allocation

 
Total asset allocation chart image Other asset allocation chart image
 

Other asset allocation

Asset classAsset type £000s%
Other Cash Deposits 4,187,568 42.8%
  Private equity 3,413,723 33.4%
  Other balances 840,651 9.6%
  Other (including aggregated private equity/infrastructure/other) 701,254 6.7%
  Infrastructure 547,260 6.0%
  Derivatives 179,353 1.5%
Total     10,936,038 100.0%

Net return on investment based on aggregated Fund accounts year to 31 March 2014

Net return on Investment

Net return on investment % is calculated by dividing the net return on investment by the average value of the fund over the year - this differs from calculated performance.
The average net return on investment, and total for the scheme on a aggregate basis, for the year ended 31 March 2014 was 5.9% (2013 12.5%). The average investment expenses were 0.3% over the period (2013 0.3%), therefore the gross return on investment was 6.2% (2013 12.8%).

The above chart shows the distribution around 5.9%, for 2014, with most funds falling in a range of between 0.0% and 10.0%. For 2013 the distribution was around 12.5%, with most funds falling in a range of between 9.6% and 3.2%.

Investment Performance

The following report for 2014 has been provided by State Street Investment Analytics (SSIA).

2014 financial market environment

Equity markets continued to perform strongly with most developed markets producing returns in the high teens in local currency, however much of this return was eroded for UK investors in the US and Japan by the strength of £ Sterling which gained 9% against the US Dollar and 17% against the Yen over the year. UK equities were below the overseas average but returned 11% for the year. Active managers continued to add value relative to the FTSE All Share index, the fourth consecutive year that this has now occurred.

UK bonds posted only their third year of negative results in the last twenty, giving up some of the extremely strong results of the recent past. Index linked gilts, likewise produced a small negative for the year.

The performance of alternative investments was disappointing. Private equity returned 5% whilst hedge funds averaged only 4%. Pooled multi asset (diversified growth) investments returned only 3% for the year. Property returned 11% for the year, whilst an excellent result in absolute terms this was below the IPD index.

5 year asset allocation strategy

The average asset allocation looks broadly unchanged over the last five years. Within the asset categories however there has been some more significant shifts – the UK equity weighting is now less than 40% of the total equity weighting and many funds are now investing through global pooled vehicles. Within bonds the average fund now has most of the UK exposure within corporate rather than government issues whilst within alternatives we have seen investments in active currency and GTAA almost disappear.

5 and 10 year investment performance

The LGPS five and ten year investment returns look substantially better than they did as end March 2013. This is the result of dropping the large negative equity results of 2002/03 and 2008/09 from the respective time periods. Over most time periods now LGPS funds have achieved a return of between 7% and 8% pa, comfortably ahead of most actuarial assumptions.

Investment Performance and Asset Allocation Relative to Corporates

This summary is based on 85 LGPS funds with a total Market Value of £175bn. The corporate pension fund universe based on 109 Funds (covering 60% of UK corporate funds) with a total market value of £327bn. Over the last 3 years the investment performance of LGPS pension funds is 0.3% less than corporate pension funds, however over 5 and 10 years the investment performance of LGPS funds exceeds that of corporate pension funds by +0.9% and +0.1%.

Performance Relative
to Corporates 2013/14
%
return
Local Authority Return 6.4
Corporate Return 3.7
Relative Performance 2.6
Attributable to:  
Asset Allocation 1.9
Stock Selection 0.7
 
WM Corporates small
Relative Asset Allocation % EquityFixed
Income
CashAlternativesPooled
Multi-Asset
Currency
Instruments
Property
LA End March 2013 63.0 17.6 3.1 7.5 2.0 0.0 6.8
LA End March 2014 62.7 16.5 3.0 7.5 2.8 0.0 7.5
Corporate End March 2013 36.7 44.8 3.0 9.3 0.2 -0.2 6.1
Corporate End March 2014 36.2 44.4 3.0 9.7 0.3 -0.1 6.5
Impact 1.1 1.7 0.0 - - 0.9 -

Longer-Term Peformance Relative to Corporates

 % p.a. to End March20042005200620072008200920102011201220132014
Local Authority 23.4 11.7 24.9 7 -2.8 -19.9 35.2 8.2 2.6 13.8 6.4
Corporate Funds 23.3 11.1 24 7 -0.4 -17.5 28.4 8 7.2 12.8 3.7
Relative 0.1 0.6 0.7 0 -2.4 -2.9 5.3 0.2 -4.3 0.9 2.6
% p.a.3 Yrs5 Yrs10 Yrs
Local Authority 7.5 12.7 7.8
Corporate Funds 7.8 11.7 7.7
Relative -0.3 0.9 0.1

Local Authority Universe 2014

The charts below are based on SSIA's Local Authority Universe 2014.  Note that the following summary is based on 85 funds with a total Market Value of £175,441m. The funds not included on this list are; Berkshire, Cheshire, City of Westminster, Durham, Greater Gwent (Torfaen), Hampshire, Hertfordshire, Kensington and Chelsea, Lambeth, Leicestershire, London Pensions Fund Authority, Shropshire and Tyne and Wear.

Equity performance
to year ended 31 March 2014

Equity performance three years
annualised to 31 March 2014

Equity performance Total three year

Equity performance five years
annualised to 31 March 2014

Bond performance
to year ended 31 March 2014

Equity performance Bonds One year

Bond Performance three years
annualised to 31 March 2014

Bond Performance
five years annualised to 31 March 2014

Total scheme performance Total three year

Alternatives performance
for periods ended 31 March 2014

Total Assets Performance
to year ended 31 March 2014

Total three year Total scheme performance

Total Assets Performance
three years annualised to 31 March 2014

Total Assets Performance
five years annualised to 31 March 2014

Total scheme performance Total three year

Asset Performance
ten years annualised to 31 March 2014

 
Total scheme performance