Investment Management
Management of GMPF’s assets is determined within the context of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 as amended. These require GMPF to have regard to both the diversification and suitability of its investments and to take proper advice in making investment decisions.
During 1994, the Management Panel decided to separate the assets of GMPF into two distinct parts - a Main Fund and a Designated Fund - in order to reflect a major difference between most of the employers in GMPF and that of a small number of employers in GMPF in their liability profiles. The Designated Fund is used for employers who have a very high proportion of pensioner liabilities.
At 31 March 2007 GMPF was valued at £9,563 million. Of this total, £9183 million was held in the Main Fund and invested across a broad spread of assets whilst £380 million was held in the Designated Fund and invested almost wholly in UK index-linked with a small amount held in cash.
The UK index linked portfolios of the Designated Fund are passively managed in-house.
During the course of 2000/2001 an extensive review of the external management arrangements of the Main Fund was undertaken. This review culminated in the adoption of a Fund specific benchmark and the appointment of UBS Global Asset Management (UK) and Capital International as active managers and Legal & General Investment Management as passive manager. UBS and Capital manage the securities portfolios investing in equities, fixed interest and index linked on a multi-asset discretionary basis, whilst Legal & General manage a multi-asset indexed securities portfolio.
The chart here summarises the management arrangements for the Main Fund at the end of the year.
Custody of financial assets and banking
GMPF uses an independent custodian - currently the JP Morgan Chase Bank - to safeguard its financial assets and the rights attaching to those assets. The custodian is responsible for the safe-keeping of GMPF’s financial assets, the settlement of transactions, income collection, overseas tax reclamation and other administrative actions in relation to the investments.
GMPF’s bank is Royal Bank of Scotland.
The remaining comments and results in this Investment Report relate solely to the Main Fund.
Investment strategy
In December 2000 the Panel adopted a Fund specific benchmark, which defines the proportion of the Main Fund to be invested in each asset class.
Each year the Management Panel reviews the Main Fund’s investment guidelines for the coming year. The 2006 benchmark is summarised in the chart here.
Each of the three managers has been given a specific benchmark reflecting their perceived skills and the relative efficiency of markets. The active managers are given ranges for each asset class allowing them to make tactical asset allocation decisions.
The Fund’s strategic allocation to venture capital is 4% of Main Fund value, which is implemented by commitments to specialised funds of £60 million per year and the residual investments in a local venture capital fund of £20 million.
GMPF supports local investment predominantly through the Property Venture Fund (allocation range £100 million to £120 million), local venture capital (£20 million) and the ‘New Initiatives’ allocation. Such local investment is restricted to 3% of Main Fund value.
The graph here shows the net effect of the total investment activity of the Main Fund during the year, based on the Panel’s guidelines. As can be seen, during the year there has been a substantial switch out of UK Equities, and into Overseas Equities and Overseas Government Fixed Interest.
Performance
The graph here compares the return achieved by the Main Fund with the market/benchmark index return in each of the main investment categories during the year.
The year saw substantial market returns for both property and UK Equities and significant positive returns were achieved by Overseas Equities. Overseas Government Fixed Interest, Corporate Bonds and Index Linked all showed negative returns, reflecting the continuing strength of sterling.
The Main Fund returned 7.3% during the year and underperformed the benchmark index in the major asset classes.
GMPF subscribes to the WM Pension Fund Performance Measurement Service in order to judge its performance relative to the rest of the pensions industry. Over the long term (10, 15 and 20 years) the Main Fund’s performance is around 1% per year above average. The Main Fund is ranked in the top 10% of all pension funds over all standard timeframes in excess of 1 year. This excellent record over the longer term is also borne out in comparison with the largest 50 UK pension funds.
In addition to comparing performance with the UK pensions industry as a whole, GMPF also subscribes to WM’s Local Authority Pension Fund Service in order to assess its performance relative to all other funds which operate under the same regulations. The graph here looks at the Main Fund’s performance as compared to the local authority average over various durations.
As can be seen, the results of the Main Fund over all the time periods shown are better than the average local authority fund and have ranked in the top 5% of local authority funds over 10, 15 and 20 years, including being the top performing fund over the long term, 20 year period.
Portfolio distribution
The distribution of assets across the main investment categories within the Main Fund changes as a result of the investment strategy followed by the managers and the performance achieved within each investment category. These changes are shown in the graph here.
Economic background
The global economy expanded during 2006 with robust activity in Europe and Asia Pacific offsetting deteriorating domestic demand in the US and Japan. However, the global economy appeared to slow somewhat during the first quarter of 2007.
Prospects for US growth continued to concern investors throughout much of 2006. During the first quarter of 2007, defaults on mortgage payments from the sub-prime sector, the lowest credit households, rose sharply. So far the effects appear to have been contained, but fears remain that the increase in defaults may yet have a wider economic impact.
In the UK, there were two increases in the base rate in 2006 followed by a further quarter percent increase in January 2007 taking the short-term interest rate to 5.25%. Housing demand grew at a slower pace in the first quarter of 2007 as the cumulative impact of increased interest rates started to take effect.
Continental Europe experienced solid growth throughout 2006 driven by a large upturn in demand. Although manufacturing growth moderated slightly in 2007 this was from a high level and domestic demand appeared to hold up well.
The Asian economies remained robust and continued to be underpinned by strong exports as a result of undervalued currencies. The Japanese economy accelerated towards the end of 2006 and The Bank of Japan increased interest rates to 0.5% in February 2007 as the economy gradually emerged from deflation.
Private equity
The year saw increased levels of private equity/venture capital activity in Europe, with the highest level of funds raised since 2001 (across both the buyout and venture sectors), record-breaking buyout values, massive levels of debt available to support investment and substantial ‘exit’ activity.
Fundraising in the US exceeded the previous record levels of 2005, reflecting the creation of a number of buy-out funds each of over $10 billion and the abundance of available debt which has contributed to ever-increasing deal sizes in the large buyout market. The big question being asked is whether or not such levels of deal size are sustainable in either the European or US markets.
Experienced private equity/venture capital managers continued to invest, build value within portfolio companies and return cash to investors by using inexpensive and ‘covenant-lite’ debt to finance recapitalisations or secondary buyouts and trade sales to achieve exits.
The Initial Public Offering market in the US increased significantly during 2006 whilst IPO activity in Europe remained weak, leaving private equity managers to seek other attractive exit routes for their investments.
One memorable feature of late 2006/early 2007 was the raised profile of the private equity/venture capital industry. Despite its success (or perhaps because of it), the industry became the target of an unprecedented public relations campaign which may lead to significant changes in the tax and regulatory frameworks.
More reliable benchmark performance figures are becoming available for private equity and, measured against these, GMPF’s longer term private equity performance remains positive. GMPF’s one year performance to 31 March 2007 is 22.5%. Over 5 years, the average return is 13.2% per year, whilst the ten year return is 30.4% per year. Since inception in 1981, the average annual return is 18.6%.
The Fund invests in private companies via two routes:
Direct local holdings: GMPF’s direct local private equity vehicle, Ventures North West, is advised by Aberdeen Asset Managers. Ventures North West has targeted investment in the Greater Manchester and North West area. As a result of a number of management changes within the advisor during 2005 significant new investment was ended and the focus has subsequently been on realising the portfolio.
During the year further investment of £0.1 million was made into an existing portfolio company which was subsequently sold. There were five full realisations and six partial realisations achieved during the year amounting to £7.4 million.
Indirect holdings: The majority of the GMPF’s private equity investment is made via pooled vehicles raised by specialist management teams. Investments were made in a further 9 funds in the year resulting in a portfolio of 69 active funds. The portfolio is diversified by stage of investment (from early stage investments to very large buyout investments) and geographic location across the UK, Europe and the US. The target rate of investments was increased with effect from 1 January 2006 to £60 million per year.
Of the £454 million committed to these investments, some £297 million has been drawn down and invested by managers in a total of over 1,300 individual companies. In addition, £350 million has been received back through distributions of realisations and income.
GMPF’s adviser on investment strategy for this portfolio is Capital Dynamics Ltd.
The value of assets currently invested in private equity is £2 million direct and £135 million indirect.
New Initiatives Allocation
In addition to the GMPF’s investments in private companies, investments have been made in a number of funds focussed on the Private Finance Initiative (PFI) and Infrastructure sector using an allocation from the New Initiatives programme. To 31 March 2007, the Fund had made commitments totalling £37 million to five funds, with a commitment of £10 million being made to one new fund raised in year.
During the year a further £13 million was drawn down and invested by managers and £4 million was returned through distributions of realisations and income. The value of assets invested in PFI/Infrastructure funds is £22 million.
Property
The Main Fund’s property portfolio has continued to perform well. It has beaten its benchmark over one, five, ten and twenty years. At 31st December 2006 it contained 69 directly-owned investments valued at £569 million and its indirect portfolio was composed of seven specialist property unit trusts with a value of £148 million.
No properties were bought for the directly-owned portfolio during the year. |
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Three properties were sold during the year. Two were small investments but the third was a larger mixed-use property in central Sheffield that had performed well since purchase several years ago but was deemed suitable for disposal for strategic reasons.
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The indirectly-owned portfolio was strengthened by a commitment to the Standard Life UK Property Development Fund. This is the Main Fund’s first indirect investment solely devoted to development, and the first large-scale investment in development for many years. The Standard Life UK Development Fund plans to invest in high-quality developments throughout the UK, and our commitment will be drawn down gradually as development finance is needed. |
The holding in the Henderson Central London Office Fund made a strong contribution to the portfolio’s outperformance, and vindicated the decision to make such a large investment in an indirect specialist vehicle rather than search for properties to buy in the directly-owned market. In addition all of the directly-owned Central London offices made excellent contributions to the portfolio’s overall performance.
The portfolio continues to enjoy a higher than average income return coupled with a low risk and defensive profile. It is well-diversified, by sector, location, and tenant. The directly-owned portfolio contains high street shops, small shopping centres serving local needs, retail parades, retail warehouses, town centre offices, offices on business parks, industrial estates, and some single-let industrial properties. Exposure to out-of-town fashion parks, developments, large regional shopping centres and high value Central London offices is derived from the indirectly-owned portfolio.
This eye-catching Vue cinema stands on The Coliseum, next to the Cheshire Oaks Designer Outlet Centre. Other tenants at The Coliseum include restaurants and a Ten-Pin Bowling Alley. The Leisure Fund Unit Trust, owner of The Coliseum, has assembled a unique portfolio of such investments and GMPF has recently bought units in this Fund.
Greater Manchester Property Venture Fund (“GMPVF”)
The GMPVF with a financial allocation in excess of £100 million creates property investments by a process of:
- site acquisition
- building design
- direct property development
- property letting/management
in order to generate state of the art office, retail, leisure, industrial/workshop accommodation.
Since its establishment in 1990 GMPVF has developed more than 1 million square feet of commercial buildings within the Greater Manchester area.
Whilst aiming to achieve a commercial rate of return on all its property investments GMPVF also aims to develop commercial buildings in order to create/preserve jobs and to boost the North West local economy. In addition GMPVF seeks to make an environmental impact through regeneration. The Deva Centre in Salford is a good example of the regenerative impact of GMPF’s investment where a derelict brewery has been converted into high quality accommodation that is fully let.
At present the target area for GMPVF property investments is the North West of England with a particular focus on Greater Manchester.
In 2006 GMPF undertook a procurement exercise which resulted in the appointment of GVA Grimley, a firm of property consultants with national coverage, as the new manager of GMPVF with effect from January 2007.
Since the appointment of GVA Grimley we have recommenced presentations of GMPVF to local authorities in order to identify investment opportunities. This has started with visits to local authorities located outside Greater Manchester. As a direct consequence of the presentations sites located in two local authorities are currently in the early stages of investment due diligence. Presentations to the various Greater Manchester local authorities will recommence later this year.
GMPVF has an option to develop a further site at Westwood Park, Wigan which is currently under consideration following the construction by Wigan MBC of a new roadbridge over the canal and highway network to provide improved access to the Park.
GMPF has recently decided to undertake the redevelopment of Elisabeth House, St Peters Square, Manchester in conjunction with a partner. It is anticipated that the partner selection process will be concluded by the end of 2007. Following the appointment of a partner we will then appoint a building consultancy team and seek planning consent for the proposed new building.
At the Deva Centre, Salford the Phase II scheme which is now fully let and income producing is being marketed for sale in order to take advantage of the buoyant property market.
In Oldham town centre the Fund in partnership with Oldham Borough Council is proposing to construct a 30,000 square feet office building. Construction work is due to commence on site in Autumn 2007 with completion to be achieved by the end of 2008.
Architects impression - proposed new office building for King Street Oldham
At Stalybridge GMPVF is working with Tameside MBC in order to promote a mixed use scheme.
Myners principles
In March 2001, Paul Myners published his Review of Institutional Investment. It was a wide ranging report on how some of the main players - trustees, actuaries, investment consultants and fund managers - carry out their roles. The Government supported the report’s conclusions, and in October 2001, it issued a revised set of 10 investment principles.
In December 2004, HM Treasury published a consultation document reviewing progress made with the recommendations in the Myners Report. GMPF officers had participated in the review and the Fund considers the consultation document to be positive in terms of the Local Authority ‘model’ of appointing lay councillors working with Fund officers giving expert advice.
The National Association of Pension Funds (NAPF), of which GMPF is a member, was also generally supportive of the review’s findings and the revisions proposed to the current principles. The NAPF is currently carrying out a further review on behalf of HM Treasury to assess progress. It is expected that the review will be completed by October 2007 and, when published, will be considered in relation to GMPF’s Statement of Investment Principles.
This section summarises the current Fund position on the 10 best practice principles. Further comment is incorporated in the Statement of Investment Principles., details of which can be found below.
1. Effective decision making: Key strategic investment decisions are taken by the Pension Fund Management Panel, for example asset allocation and investment management arrangements. In taking such decisions, the Panel receives advice from three external advisors and in house staff. Implementation
decisions are delegated to the Director of Pensions and external managers.
2. Clear objectives: GMPF’s investment objective is to help deliver low and stable employer contribution rates. This equates to a long term real rate of return of approximately 4%. An asset liability study undertaken during 2000 culminated in the adoption of a Fund specific benchmark.
3. Focus on Asset Allocation: The Panel gives in depth consideration to asset allocation issues in June each year. Material market movements would result in further consideration at other times. GMPF’s benchmark is well diversified and periodically the merits of other asset classes are reviewed.
4. Expert advice: GMPF receives investment advice from its Actuary, other external advisors and in house staff. It also buys in specialist advice where appropriate, for example on private equity and corporate governance issues. The Director of Pensions provides the link between GMPF and its Managers and Advisors.
5. Explicit mandates: Each manager has a specific benchmark and explicit risk parameters for both tactical asset allocation and stock selection.
6. Activism: GMPF is developing its approach to activism through its Ethics & Audit Working Group and the instructions it gives to its managers, including its voting guidelines. Managers are required to report to this Group on their governance activities. GMPF is also working with other local authority pension funds where there is a common interest to influence companies for the benefit of shareholders.
7. Appropriate benchmarks: GMPF’s active managers have sufficient flexibility in both asset allocation and stock selection to deliver the target 1% outperformance of their benchmark. The benchmarks set for each manager aim to take account of their perceived strengths and the relative efficiency of markets.
8. Performance Measurement: Performance of managers is monitored on a quarterly basis (annually for property).
9. Transparency: A revised Statement of Investment Principles was published in October 2002. A Funding Strategy Statement was published in March 2005.
10. Regular Reporting: GMPF communicates at least annually with all its members. Pensioners are also invited to an Annual Forum. The Annual Report, Statement of Investment Principles and Funding Strategy Statement are available to all members, and are published here on our website.
 Click here to view the Funding Strategy Statement  (241 KB)
Click here for the Statement of Investment Principles (159 KB)
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