LPP Investments quickly established its investment management credentials since launch in 2016, developing a suite of seven funds across different asset classes, bringing together industry experts with deep expertise and proven track records, and delivering better than expected results for its clients and their members.
Chief Investment Officer, Richard J Tomlinson outlines some of the strengths of the business that have enabled LPP Investments (LPPI) to reach this point, and how it is positioning for the future.
1: What makes LPPI different from other LGPS pooled fund investments?
Around one third of the portfolio is managed internally, giving our clients improved economics, the ability to better manage risk profile, and greater discretion over the management. To do this you need to have a bigger, more experienced team, and our team is our core strength.
All members of the senior team have come from the private sector and they bring the best of that world to the benefit of the public sector. Most have experience of between 15 and 25 years in public or private markets and have held senior positions at large fund managers and investment banks, giving us a significant edge in the LGPS pooling space. In times of market stress this allows us to respond effectively and tactically to fast-moving market events.
Our governance model also sets us apart as we operate with more delegated authority than our peers
2: How do you choose the right investments?
Our evergreen approach is illustrated by the way we buy equities and hold them for a long period of time. We seek to buy quality franchises with clear pathways to growth that are able to compound returns over the long-term. That hasn’t changed in years and is the ongoing strategy.
Across the portfolio we have a bias towards quality, stable, more defensive assets; many are also cash-yielding and have inflation participation properties – these are all things that are key to long-term success in managing a defined benefit pension fund.
We are not fans of thematic investing. From a risk management point of view, we don’t want to build up exposure to any one theme that is fashionable in the market and then be left with it when that theme reverses.
We’ve seen this multiple times, where every pocket of a portfolio is driven by one or two themes that everyone is excited about. Between 2004 and 2006 it was oil and energy, in the late 1990s it was internet technology stocks, and so we’re just very cautious about taking overly large bets in that way. And with the long-term risk/return profile of a pension fund, we don’t need to.
3: Is there a particular asset class that you like or are excited about?
We think the best opportunities this year will be in the credit markets. You want to own what the US Federal Reserve wants to buy, as the adage goes, and currently it’s investment grade credit.
There’s going to be a lot of reshaping and reprofiling of bank loan books. It's likely that we are going to see an awful lot of distressed loans and bonds later this year. Those managers with the skills to pick their way through that wreckage will do very well.
The credit market is so huge and there seems to be a lot of credit written at the wrong price.
There’s always opportunity in this market - someone who has sold at the wrong price or who needs liquidity.
4: How do you see LPP Investments’ role in the industry developing in the future?
I think asset owner style managers like LPP Investments are rising in power and importance, and therefore are coming into a more interesting role in the industry. That will only continue in the coming decades.
The asset management industry is going to change as result of this shift in power. It has become bifurcated between the niche, specialist operators, which are high cost, and the low-cost asset gatherers. The middle ground will continue to struggle, but the end result will be that costs will go down across the board for everybody.
Beyond that, fundamentally our role or purpose is to continue to hedge public liabilities. If we do a better job and manage the assets in a better way, it’s more likely that there will be less cuts to services and more facilities we can all benefit from.
That’s because the contributions to the schemes come directly from the county councils and other (mostly public sector) scheme employers. If you are doing a better job in managing the assets, you are increasing the cash that’s available to spend on the things that really matter.
5: And finally, as the impact of the Coronavirus is being felt in the markets, what is LPP Investments’ approach through this period and what is the team doing to mitigate risk?
We are managing cash and liquidity in the portfolios to ensure members’ pensions are paid in full every month, on time, without any major disruptions to the investment portfolio. That is the mission in the short term. We are managing assets prudently for the long term and taking advantage of opportunities where we can see the ability to enhance value.