Not-for-profits should band together to set up an asset manager, says David Rowley
What if all the not-for-profit investment funds in the UK got together and created their very own property company? This is an idea that is so simple I had to check on the internet it does not already exist.
My premise is that NEST and the Peoples’ Pension, with £2.5bn in assets, do not have the scale to do this together. However, if they teamed up with charities, sympathetic employers with unbundled DC plans, LGPS pools and other not-for-profits, there could be scope for a venture.
The Australians have shown this is a proven business model
The Australians have shown this is a proven business model. IFM Investors is a well-known infrastructure manager, owned by a collection of not-for-profit super funds. But equally prominent is ISPT, which acquires and manages Australian property on behalf of 32 profit-for-member superannuation funds, insurance funds and charities.
It’s worked out sweetly for those 32 funds. If you can access competitively priced property and infrastructure, then these investments can form a larger part of your asset allocation. If you do it in a yield hungry environment, as yields on global bonds have hit record lows, then you are laughing.
Eight out of the ten best performing Australian supers had assets managed by ISPT
Accordingly, eight out of the ten best performing Australian super funds for the year to June 2016 had assets managed by ISPT. (To any concerned City people, I should add these funds use other property managers too.)
The stakes for NEST and the Peoples’ Pension are high, as the DC funds of Aviva, L&G, Royal London and Standard Life already keep their costs low and returns up by purchasing fund management services from their own fund management operations.
And once auto-enrolment is complete in 2018, employers are going to start comparing five-year returns and asking awkward questions.
One obstacle is the practice of daily pricing of assets and daily dealing
One obstacle for all sets of DC funds is the practice of daily pricing of assets and daily dealing. Most investment platforms catering for DC follow this practice and DC funds themselves lack the scale individually to innovate around it.
NEST uses a Real Estate Investment Trust (REIT) alongside its direct property allocation to help with liquidity on daily dealing as a patch up.
In Australia, the main regulator of superannuation says that it is up to the super funds individually to strike a fair daily price for such illiquid assets. This can be done with an independent assessor chosen to perform such a task. The Pensions Regulator could take a similar lead by sanctioning a similar move for UK DC funds.
David Rowley is a freelance journalist. This article first appeared on his blog, All about DC