Illiquid alternatives have been the most sought-after investments among local authority pension funds this year, while schemes are also set to take advantage of selected investment opportunities in emerging markets.
MandateWire data show that alternatives have consistently attracted more than half of all expressions of interest from Local Government Pension Scheme funds during the past three quarters as the hunt for diversification, inflation protection and stable income streams has intensified.
Expressions of interest comprise manager searches, planned investments in a new asset class and planned investments in existing asset classes recorded by MandateWire.
We want to partner with managers that have fully integrated ESG risk factors
Graham Long, Border to Coast
In Q1, demand for alternatives was particularly high, with the broad asset class attracting 75 per cent of all expressions of interest in broad asset classes.
Although demand for alternatives dropped in Q2 to 59 per cent of all expressions of interest, non-traditional assets remained the most popular asset class among LGPS funds.
Illiquid alternatives — namely infrastructure, private debt, private equity and property — have been the most sought-after alternative sub-asset classes.
For instance, the £2.7bn Warwickshire County Council Pension Fund agreed to start evaluating managers for infrastructure and private debt commitments planned for 2023.
The scheme, which aims to make investments via the Border to Coast Pensions Partnership but also with external asset managers, commissioned Hymans Robertson to carry out manager evaluations for the commitments it plans to make outside the pool.
The £3.3bn Cumbria Council Pension Fund also updated its interim asset allocation targets and agreed to raise its infrastructure equity target by 3 percentage points and invest in a private credit fund, as part of its plan to reach the 14 per cent strategic asset allocation target for private debt.
Based on expressions of interest tracked by MandateWire in Q1 and Q2, LGPS funds are planning to invest more than £1bn in infrastructure, while £459mn is set to be allocated to private debt.
Emerging markets appeal
MandateWire data show that despite the volatile market environment, equities have largely been the second most popular asset class among local authority pension funds. Schemes have been particularly interested in environmental, social and governance-related investment opportunities.
Global equities were attractive up until Q2, when emerging market equities overtook the asset class as the most sought-after equity investment.
The LGPS pools were especially active in establishing emerging market equity funds during the quarter.
The Access Pool, which handles £35bn in pension assets for 11 LGPS funds worth a collective £59bn, confirmed to MandateWire in June that it was in the process of establishing an emerging market equity fund to be launched in 2023.
The £36bn Border to Coast Pensions Partnership, which handles the assets of 11 LGPS funds worth a collective £55bn, plans to launch a £1bn Emerging Markets Equity Alpha Fund in the first half of 2023. The pool was looking for up to two ex-China emerging market equity managers to handle part of the fund’s assets.
While BCPP expects managers to have demonstrable experience in emerging markets equity investing and a long-term, high-conviction approach to stock selection, it will also assess managers’ efforts to integrate ESG factors.
BCPP head of external management Graham Long said: “We want to partner with managers that have fully integrated ESG risk factors, including climate change considerations, into their investment process, reflecting our own beliefs in responsible investment and active stewardship.”
Post-pandemic retirement surge increases LGPS expenditure
A rise in the number of people retiring following the pandemic contributed towards a 6.6 per cent increase in Local Government Pension Scheme expenditure, data from the Department for Levelling Up, Housing and Communities has revealed.
Indeed, investors planning to invest in emerging markets have been advised to carefully consider ESG factors when they select external managers.
Hymans Robertson investment research senior consultant Oriana Mezini noted in a paper that ESG standards and disclosures in China and many other emerging markets lag developed countries.
Mezini said: “it is sensible to gain exposure to China through active managers who can distil and select the best set of listed equity opportunities from a risk-reward perspective, applying both bottom-up and top-down analysis to help navigate this market”.
This article originally appeared on MandateWire.com
