London Pensions Confirm First Pooled Fund Launch

London’s local authority pensions have received regulatory approval for their pooled funding vehicle and will launch their first sub-fund within the next four weeks.

“Throughout next year and beyond we will be opening more sub-funds covering the full spectrum of asset classes in response to the boroughs’ needs.”Three pensions have pooled money to back a global equities fund, to be run by Allianz Global Investors and set to be launched before Christmas.

In a statement released today, the London Collective Investment Vehicle (CIV) confirmed it had been fully authorised as an investment entity by the UK’s regulator, the Financial Conduct Authority.

A further eight sub-funds will be opened by the end of March 2016, said Hugh Grover, the London CIV’s chief executive. This would bring the CIV’s total assets to roughly £6 billion ($9.1 billion) as it aims to cater for all major asset classes.

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The CIV is backed by all 32 London public pensions, as well as the Corporation of London, and will be available to other local authority funds once it is fully established.

“It has been a real privilege to be leading this ground-breaking project on behalf of the London boroughs,” Grover said. “Overall the boroughs have some £25 billion of assets and throughout next year and beyond we will be opening more sub-funds covering the full spectrum of asset classes in response to the boroughs’ needs.”

“London local government has been leading the way in developing proposals for greater collaboration across the local government pension schemes,” added Mayor Jules Pipe, chair of London Councils. “I am extremely proud of what has been achieved by everyone involved in setting up London CIV, which is already delivering significant financial benefits for the boroughs, the pension scheme members and local taxpayers.”

The CIV was established under the UK’s new authorised contractual scheme rules, allowing tax-efficient investment funds to be domiciled in the UK.

UK Chancellor George Osborne is pushing the country’s public pensions towards pooling their assets and has targeted collaborative vehicles of £25 billion to £30 billion. Primarily, he wants these pooled assets to be available for infrastructure investment, but the Treasury currently has little power to force investment in specific asset classes.

However, several pensions have expressed interest in accessing infrastructure and other alternative asset classes, which is made easier through scaling up assets.

Institutional investors are their own worst enemy due to systematic behavioral biases that rob them of potential alpha, according to Research Affiliates.

The firm’s co-founder Jason Hsu argued that there is strong evidence the equity market premium is countercyclical and predictable using valuation ratios. However, investors’ manager selection process and “trend-chasing allocation decisions” could contribute to persistent low returns and return gaps—and this could be hard to fix.

“The prognosis for improvement is unfortunately pessimistic,” Hsu said. “No longer can behavioral biases be overcome by the greater mastery of one’s emotional state or by attaining greater investment enlightenment.”

“Most investors might benefit from simply forgetting the ID and password to their trading account.”Specifically, investors often use short-term performance as the basis of evaluating manager skill, Hsu said, despite data that show underperforming managers tend to outperform in the future and vice versa.

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Though many investors attempt to time alpha, they “do so very poorly,” according to Hsu. “These investors earn negative dollar alpha, on a gross-of-fee basis, and thus provide a large reservoir of alpha to others,” he continued.

Furthermore, Research Affiliates said investors tend to fall victim to herd mentality and often blame others for “random bad outcomes.”

These behavioral biases have now become an organization problem, according to Hsu. Investment consultants are unlikely to recommend managers with poor recent performance, and pension CIOs tend to stay away from managers with a negative trailing three-year alpha.

“The investment ecosystem has conspired against the end investor,” Hsu said. “The path of least resistance is the path most often taken: buy recent performance.”

The solution is to become a contrarian—buying the out-of-favor styles and stocks that are trading below historical norms—and earning “a handsome ‘fear’ premium for taking the other side of the industry’s trades.”

However, this is easier said than done.

“Indeed, most investors might benefit from simply forgetting the ID and password to their trading account,” Hsu said.