Agenda item

Representatives from the London CIV will be in attendance for this item.

Representatives from the London Collective Investment Vehicle (LCIV) - Hugh Grover (Chief Executive) and Larissa Benbow (Head of Fixed Income) - attended for the item to update Members on LCIV progress.

The LCIV aimed to be the investment vehicle of choice for Local Authority Pension Funds through collaboration and performance. The LCIV was launched in December 2015 as a fully authorised and regulated investment management company set up by local government for local government. Founding members comprised London boroughs and the City of London Corporation.

The LCIV was authorised to operate an Authorised Contractual Scheme Fund (UK version of a Tax Transparent Fund) and the LCIV would be building the fund over the next few years, aiming to grow assets under management to £25 billion by 2020.

Members were advised that all 32 London Boroughs (including City of London) were now signed-up to the CIV (32 as L B Richmond and L B Wandsworth had merged their funds). The LCIV provided a range of Investment Funds comprising four multi-asset/total return funds, four global equity funds and one UK equity fund. On Global Equity Procurement, three sub funds had been launched with additional sub-funds also recently launched. Additionally, options were being assessed for a further two or three sub funds for launch in December 2017 (dependent on borough demand). 

In regard to Fixed Income the LCIV had assembled a blend of products and were meeting with boroughs to assess their appetite for fixed income and funds to recommend. Research was also being developed and work undertaken with just over 1500 fixed income funds. Two fixed income sub-funds were due to be opened by March 2018 or sooner. For 2018/19, it was intended to open four fixed income sub-funds and one property sub-fund with seven sub-funds (including infrastructure and alternatives) intended to be opened in 2019/20.  Fund options under consideration were:

·  Multi-Asset Income (2 to 4%, 4 to 6%, 6 to 8% expected returns)

·  Multi-Asset Credit (4 to 6% expected returns)

·  Private Debt (4 to 6%, 6 to 8% expected returns)

·  Buy and Maintain (2 to 4% expected returns)

With a range of products to be opened it was for L B Bromley to choose whether to invest in the LCIV products. Decisions on Asset Allocation and Investment Strategy remain local with L B Bromley free to decide on any sub-funds on the CIV platform for investment. The CIV decides on sub-fund manager selection and removal.

An Annual Service Charge of £25k would be made per annum and a Development Funding Charge of £75k p.a. introduced this year was estimated to reduce to £10k p.a. by 2021/22. Reference was also made in the Presentation to Management Fees on Assets Under Management (AUM) on the CIV platform; for Passive Management Fees, the CIV had negotiated rates on AUM (outside of the LCIV Pool). A particular benefit from investing through the LCIV concerned the level of fee savings that could be offered.

Under Stewardship, reference was made to the requirement for Funds to have an Investment Strategy Statement. The Presentation highlighted good governance which was integrated into the CIV process to hold managers to account for monitoring of investments. There was also a Joint Committee (Member Committee) and a Policy Statement about adopting Local Authority Pension Fund Forum (LAPFF) guidelines for voting. LAPFF alerts were followed which were also fed to Fund Managers for following (unless there was a technical reason not to do so). The Working Group of the Joint Committee considered the whole area of Stewardship, Voting and Environmental, Social and Governance (ESG) going forwards. With ESG integration there was an emphasis on Governance as a key factor in affecting returns to shareholders. There was also an IAC Working Group on Stewardship, a Stewardship Code Compliance, and Sustainable Equities as part of global equity procurement and a Cross-Pool Working Group.

All boroughs investing through the LCIV had a global offering – a blended solution with sub-funds e.g. UK Corporate Bonds or European Bonds. There was some appetite for bonds and emerging market strategies. Another LCIV team were responsible for Multi-asset Income Funds (MAIF) e.g. research, although the LCIV would need to discuss further with boroughs. The LCIV hoped to launch an offering on MAIF next year.

In regard to fee savings, savings approaching £6m had been achieved so far. Reference was also made to changes to Strategic Asset Allocations with investments in equities and gilts reducing and investments in Multi-Asset Income, Illiquid Credit, Property and Infrastructure increasing. 

Fund Development was being taken forward against a background of LGPS Pension Funds facing maturity with workforce reductions leading to a greater demand for assured cashflows. Cashflow was negative before investment income for half of London funds. Income sources were also scarce.

An Investment Advisory Group of the LCIV comprising borough officers and fund managers met monthly and a Fixed Income Working Group reviewed the development of suitable products. The final decision to invest in a strategy offered through the CIV resided with individual boroughs. 

Should a borough switch funds to a CIV fund, the CIV would help transition from one fund to another. The level of savings made so far at £6m excluded transition costs; however, most funds that had transitioned were making savings in year.

Highlighting that L B Bromley had managed its own fund well, a Member questioned the value of investments in infrastructure and how such an investment can produce a good return for the fund. Members heard that investments can be made in liquid funds and direct investments. Accounts were being set up with infrastructure managers with fee savings; there are fewer clients to service and dedicated funds with the same level of governance. Cash flows could be generated over a 25-year period with yields of 10% to 12% and the delivery of fee savings. The Government was focused on infrastructure and infrastructure funds were being requested by boroughs;  however, it was for boroughs to decide whether to invest in such funds.

Expressing concern on developments, a Member suggested that demand was almost being created through the CIV. Cost savings had also been highlighted from CIV investment whereas L B Bromley was particularly attracted to (high) net returns. Investment through the CIV also appeared to be based on funds performing less well than products chosen by L B Bromley. No upside in benefit could be seen from the LCIV for the L B Bromley Fund. He suggested having a core system that L B Bromley might, in principle, be happy to pay for but if other boroughs want additional products (e.g. a low carbon fund), those boroughs should pay for them (with no costs passed to L B Bromley). 

The CIV would only open an infrastructure fund making economic sense and there was no requirement for L B Bromley to invest in infrastructure or low carbon funds. Such products interested a number of boroughs and would be opened up for them - the investment costs being borne by those boroughs alone and not the remaining boroughs (CIV staff costs being an exception). The CIV would also like to open up funds of interest to L B Bromley. Much of the CIV’s emphasis on cost reduction derived from the Government’s drive but other considerations were also looked at by the CIV. The pooling agenda came in response to earlier Government consideration (around 2013/14) to merge all LGPS funds.

Another Member suggested that a bottom-up approach is better than top-down and enquired of the number of staff employed by the CIV. He also enquired of the cost for the Joint Committee and its Working Group on stewardship, voting and ESG going forwards and of the cost of the Cross-Pool Working Group. He also sought advice on how much of the CIV’s work is legally required suggesting that good value for money is not being obtained from the organisation with Council Tax payers – including those of

L B Bromley – ultimately paying. A lean organisation is needed and it was suggested that staff be contracted (hired) for a specific function in line with a number of employment arrangements in the private sector. The Member saw the CIV performing as an intermediary which was not needed. Additionally, other boroughs were not performing as highly as L B Bromley - it was necessary to perform to the best and not go with the majority.   

It was explained that the CIV started as a voluntary initiative by the London Leader’s Committee not wishing to see individual funds having to merge as threatened at the time (2013/14). The LCIV staff complement comprised a team of 15 with funds managed to the value of £15.6bn. The CIV encouraged engagement with other boroughs and were under close scrutiny by the Sub-Committee’s Chairman and Chairmen of equivalent Committees in other boroughs. It was not possible to provide a figure on costs for the Joint Committee and its Stewardship Working Group and Cross-Pool Working Group at the meeting (but details would be provided later). The CIV representatives would take away points made, reflect upon them and discuss with their core Committee. The Chief Executive thanked Members for their frank feedback and would provide responses. CIV representatives would be happy to attend a future Sub-Committee meeting. 

The Chairman thanked the representatives for attending and confirmed the Sub-Committee’s willingness to engage. Outlining the particular

L B Bromley viewpoint (in summary), the Chairman advised that the Sub-Committee was looking to see the CIV arrangement work well for all concerned. 

The CIV representatives left the room and the Chairman proposed that the CIV Investment Officer (CIO) be invited to a future meeting – possibly the Sub-Committee’s meeting on 20^th February 2018. Questions can then be asked on the performance of CIV funds. A Member preferred to see a presentation beforehand and the Chairman suggested this be provided at least a week in advance of the meeting. 

[Post-meeting note: the CIO has since left the CIV, and not yet been replaced (as at 18/01/18) so the invitation will be deferred to a later meeting of the Sub-Committee].