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“I arrived five days before Lehman as the inaugural CIO of the Barclays UK Staff Pension Fund—my first role as an asset owner. The fund had no in-house investment structure, and it became clear we needed some. In 2005/2006 the trustees had diversified out of UK equities into overseas equities, commodities, hedge funds, and increased credit exposure. Numerous subcommittees had led to sequential diversification, which wasn’t the most efficient approach.
We started building a treasury/implementation team at the heart of the operation, which turned us from backward-looking, reactive decision-makers to more proactive cash-flow and liquidity managers. We brought in additional investment management staff—mainly from the hedge fund-of-funds sector—who were strong analysts and knowledgeable on strategies in our portfolio. They were also comfortable with new instruments our fund managers were using. Even then, we were still a monitoring and oversight function rather than investment managers. We wanted to take back control of the information flow. We don’t claim to call interest rates better than anyone or spot the next big outperformer, but we have an information advantage.
We decided that in certain areas we had the skill to outperform. For long-term strategic or short-term dynamic asset allocation, for example, we were in a better position to grab market opportunities that would suit us best. In early- to mid-2009, we created “Project Oak”, staffed by trustees and some risk specialists from the bank. It swapped equities for futures and introduced some gearing. With the proceeds we bought index-linked gilts, increasing our hedge ratio, but also participating in what we hoped would be a reversion from 2009 equity market lows. This real-time flexible management of the portfolio worked. We wanted it to continue.
In 2010, we created the FSA-Registered Oak Pensions Asset Management (OPAM). It gave us real-time management and clear delegation. The trustee board shrank. We looked at the terms of reference for the investment committee: Anything strategic and “trustee business” we coloured green and gave to the board. Anything else—operational, investment decision-making—was placed within Oak’s investment mandate. The trustees considered the investment committee redundant and got rid of it. We have a strategically focused, informed trustee board with clear delegation to a highly qualified investment team that has a whole toolkit of instruments, asset classes, and the ability to execute at pace.
We were fortunate to have a board who understood the financial services industry, and many of the instruments we wanted to use, which meant there was less discussion about the technical side and more discussion about outcomes. We learnt that trying to micromanage a small part of a large fund’s allocation takes an awful lot of time. We now prioritise better and have changed a lot. OPAM has the trustee mandate to manage the whole fund, but we work with consulting firms where we can’t beat their input. We use third parties to select long-only equities and bonds managers, and select ‘diversifiers’ ourselves. The only underlying assets we pick are the LDI [liability-driven investing] specialist bonds. We concentrate on asset allocation, mandate design, and implementation-an absolutely huge value-added part of the proposition. If you can execute simultaneously at pace, you accrue returns.”