UK's Coal Funds Create Investment Subsidiary to Improve Governance, Returns

(August 22, 2011) — In a mission to improve its governance and returns, Coal Pension Trustees has founded a standalone investment subsidiary, Financial News has reported.

Coal Pensions — which manages the £20 billion pension funds of the UK’s formerly nationalised coal industry — built the team in an effort for its trustees to have an in-house source for market expertise. The legal position of the in-house investment office will be clarified following approval by the Financial Services Authority in June.

According to the news service, internal experts can also challenge advice given by the schemes’ external consultants – Towers Watson and Mercer.

The drive to boost in-house expertise in not unique to the UK. In recent years, the pursuit of added in-house capabilities has been especially prevalent among Canadian funds. Late last year, for example, the Caisse de Depot et Placement du Quebec, Canada’s second biggest pension-fund manager, reported plans to boost staff at its private equity unit by around 25% in 2011 as it pursues its mission to contribute to the economic development of Quebec.

For more stories like this, sign up for the CIO Alert newsletter. 

Similarly, the Ontario Teachers’ Pension Plan (OTPP), which won aiCIO’s Industry Innovation Award last year for public pension funds with over $15 billion in assets, boosted its in-house asset management unit to better compete for talent. “We are honored to receive this recognition,” Neil Petroff, Executive Vice-President, Investments and Chief Investment Officer at Teachers’, said in response to its win at aiCIO‘s awards event in early December. “We have a highly skilled investment team at Teachers’ who have helped build a reputation for innovative, in-house asset management that has long distinguished our investment program.”

“We were the first with a private equity direct investment team, and were among the first to invest directly in infrastructure,” OTPP spokesperson Deborah Allan told aiCIO, noting the Canadian fund’s position as a pension fund leader in direct investments. Further evidence of OTPP’s role as a leader in boosting its internal private equity team comes from the October 18 appointment of Jane Rowe, who assumed her position as senior vice-president of Teachers’ Private Capital, the private investment department of Teachers’.

In the US, the State of Wisconsin Investment Board (SWIB) reported last September that it was looking to transfer $3.9 billion of externally managed international equity assets in-house, reflecting the financial pressure on pensions to increase the in-house management of assets and boost efficiency. “We’ve always had in-house management and we’ve increased it from 20% in 2007 to over 41% as of the end of last year,” Vicki Hearing, public information officer at the State of Wisconsin Investment Board, told aiCIO.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The Government Pension Investment Fund (GPIF), the world's largest, is pursuing emerging markets in a move to diversify into potentially risker assets.

(August 22, 2011) — Japan’s government pension investment fund is beginning to invest in emerging markets for the first time.

During the next year, the Government Pension Investment Fund (GPIF), the world’s largest, will decide which of the 50 or so asset managers competing to win a portion of the allocation it will hire, the scheme’s president Takahiro Mitani told the Financial Times. The March 11 earthquake and tsunami delayed the scheme’s investment in the asset class.

“Even though emerging markets have gotten bigger, liquidity is not as high as in developed economy markets, so they are not all markets where you can suddenly get [funds] and soon go in and buy,” Mitani told the news service.

The pension is traditionally a conservative investor, with more than two-thirds of its assets historically in Japanese government bonds. Mitani has been quoted as saying that while some say the GPIF should invest in high-risk and high-return products, the GPIF will continue taking a safe and effective approach based on a long-term view rather than a short-term one. “In 2008, when we saw the financial crisis after the collapse of Lehman, while we posted a negative result we were relatively better off than overseas pension funds thanks to our conservative, cautious stance,” he told the Wall Street Journal last October. “We posted only single-digit [percentage] loss while others posted double-digit loss.”

For more stories like this, sign up for the CIO Alert newsletter. 

As of June 2010, about 9% of GPIF’s total assets, or 10.6 trillion yen out of 116.8 trillion yen, were held in foreign equities. Its portfolio targeted a 67% allocation to domestic bonds, 11% to domestic stocks, 9% to foreign stocks, 8% to foreign bonds and 5% to short-term assets.

The move to increasingly diversify and invest in riskier assets to improve returns comes after Japan’s mammoth public pension plan took an investment loss of about ¥300 billion ($3.6 billion) in the 2010 fiscal year ending March 31, 2011. The GPIF blamed the loss on the weakness of domestic stocks and foreign bonds tied to the yen’s prolonged strength and to fallout from the March 11 earthquake. The principal reason for the fund’s anemic performance was the strength of the yen, which ate into the pension fund’s strong returns from foreign equities. Overall investment yield in fiscal year 2010 sank to minus 0.25%–a far cry from the fund’s 7.91% return the year before. The fund’s return in fiscal year 2009 topped ¥9.18 trillion ($110.3 billion), the highest return ever generated by the GPIF.

Mitani’s move toward emerging markets also echoes recent moves by Japan’s Pension Fund Association (PFA), which has said it must take on more risk to boost returns as the proportion of people over 65 years old in Japan stands at a record 21%. The fund plans to take on additional risk largely by pumping up its private equity investments, which now account for less than 1% of its entire portfolio. “We need to lessen our dependence of beta return,” Daisuke Hamaguchi, the CIO of the PFA, told the WSJ. “We are making private equity investments and hedge fund investments in an effort to make more alpha return.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742