The Strathclyde Pension Fund, the £19.7bn (€22.1bn) local government scheme in Glasgow, is considering introducing an annual value-for-money review as it looks to tighten up its investment manager fees regime.
It comes in the context of a review into investment management being kicked off by fees campaigner Chris Sier at the Financial Conduct Authority and other initiatives that are looking at the fees managers charge asset owners.
In June 2016 the Chartered Institute of Public Finance & Accountancy (CIPFA) published guidance on fund management fees. And the Local Government Pension Scheme Advisory Board (SAB), which promotes best practice and coordinates on technical and standards issues, has set out a Code for Transparency and a template for reporting.
The Strathclyde value-for-money review is one of a series of recommendations put forward by internal staff amid “ad hoc” negotiations around fees when managers are appointed, according to fund documents.
A lack of a systemic process for keeping tabs on negotiations on fees “increases the risk that the negotiations taking place with investment managers to help secure fee savings cannot be evidenced”.
So the recommendation, as part of an internal audit process, is for fees and other costs to be reviewed by “asset class, asset category and mandate” – and in the context of “investment performance expected and achieved”.
“In some instances,” according to a document presented at a meeting last month, “this may suggest an opportunity for discussions or negotiations with managers”. The suggested timetable for implementation is December 2017.The current arrangements “increase the risk that value for money in relation to investment manager fees cannot be demonstrated”.
There was scope for the fund to benchmark its savings against other investors, though no decision has been made on this yet.
Strathclyde currently has 13 external managers (roster here), with 26 further in relation to its direct investment portfolio — although the latter weren’t part of the review.
The fund has set up a fee saving spreadsheet “to calculate and record” the level of savings made through successful negations.
“We also found,” the document states, “that arrangements are in place to monitor and report the performance of investment managers and a process is in place to allow action to be taken against an investment manager where the level of performance is not in line with expectations.”
It comes as the fund, which has a strong emphasis on responsible investment and a focus on renewable energy, reported a 23.1% investment return for the year.
The fund has also carried out its first carbon foot-printing of its portfolios during the year. “The results were encouraging in confirming that the fund’s portfolios are less carbon intensive than a market-neutral strategy,” said Councillor Allan Gow, who became City Treasurer and Convener of the Strathclyde Pension Fund Committee in May.
Writing in the foreword to the report, he added the results would “inform ongoing discussions” with portfolio managers and that the foot- printing exercise would be repeated in due course.
The fund is resisting calls for it to divest fossil fuels, preferring a “smart and sensible” carbon management strategy and active engagement with companies.