Friday, 24 November 2017

    Bedfordshire enjoying the flexibility of DGFs

    Pension manager believes DGFs’ biggest threat is failing to better equities in terms of volatility of returns

    “We think that at some point in the future bond yields are going to increase, and we didn’t want to play chicken,” says pensions manager Geoff Reader, explaining why the Bedfordshire scheme decided to invest in diversified growth funds two years ago.

    The pensions team also believed it would enhance growth, something that is vital for an open defined benefit scheme such as Bedfordshire.

    Scheme in numbers

    £1.5bn - assets under management

    2 - number of DGFs used

    2012 - the year the DGF was introduced

    Since adding a DGF to the portfolio, the pensions team have been revising their alternative investments after realising that handling the timing of these investments could be easier in a DGF than a single asset fund.

    The initial plan was to look for one DGF manager, but they realised appointing two would be more suitable, because the aim was to diversify. Reader says he would consider a third DGF, because if they put more money into the fund he would want another manager.

    “We’ve two very different sorts of DGFs at the moment,” he says.

    “We’d want somebody who would be able to access the whole range of investment opportunities.”

    So far it seems to have been a successful decision – the scheme has reduced the volatility in its investment portfolio.

    One particular advantage that reader has identified is how quickly a DGF can react to changing market conditions and sentiment, compared to what the scheme’s pensions team could achieve.

    With the best will in the world, we’re looking at about a week and a half to implement a decision

    “With the best will in the world, we’re looking at about a week and a half to implement a decision, whereas a manager can just put down trade order and just get it done that day.”

    There are, of course, some risks inherent in choosing to use a DGF. The structure of the fund and access to money can be an issue, says reader. The Bedfordshire scheme is invested in some pooled DGF funds, which gives rise to the potential for counter-party risk because they don’t own the assets directly.

    More activist funds may also feel frustrated because they give up some of their voting capabilities

    More activist funds may also feel frustrated because they give up some of their voting capabilities when they enter a pooled fund.

    This will become more important to Bedfordshire, since the council signed up to the UK stewardship Code. Those are the biggest risks facing the Bedfordshire scheme individually, but reader also has some views on the challenges for the DGF industry more generally.

    “The expectation is that they’re going to produce a real return over a period of time, and when it is effectively done it will be slightly less than equities,” says reader. However, he believes the biggest threat to the DGF market will be the failure to meet that expectation as a result of upcoming conditions.

    If he could make one improvement to the DGF industry, he suggests it should be cheaper

    If he could make one improvement to the DGF industry, he suggests it should be cheaper. This is particularly important for local government schemes, since they are subject to a great deal of scrutiny on how much they spend on investment manager fees.

    Overall, reader believes local authorities can benefit from the diversification and growth prospects DGFs can offer, but they must discuss the implications with their fund managers.  

    This article is part of a special report on DGFs, sponsored by AXA Investment Managers

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