Sebastian Cheek talks to Tony Broccardo, chief investment officer of the Barclays UK Retirement Fund, about the success of its Oak Pensions Asset Management spin-off
At the tail end of last year the Barclays UK Retirement Fund launched its own asset management company, Oak Pensions Asset Management, to "give more flexibility around in-house investment decisions". The launch represented the latest phase in the centralisation of BUKRF's investment management structure, which has gone from strength to strength since 2008.
However, despite what it might look like on the outside, BUKRF chief investment officer Tony Broccardo insists the spin-off is not about to follow in the footsteps of Hermes Fund Managers - a fund manager owned entirely by the BT Pension Scheme which invests funds on behalf of more than 200 clients - and start taking on third-party money or managing funds for other pension schemes.
"It never was and is not our intention today," says Broccardo about managing third party money. "We want to be 100% aligned to the trustees because they will never be able to find that degree of alignment in the market place."
Broccardo adds as OPAM grows as a company it will not look to shed fund managers. In fact, he says good underlying managers are rare and capital constrained so OPAM will continue to focus on asset allocation with the team at the centre to be in a position to negotiate with the best managers for their asset allocation expertise.
"We're not out there wanting to pick individual bonds and stocks - the benefit of that at the centre is marginal. We want good specialists to do that; we have got to continue to focus on the key drivers and make sure we are tailoring the fund to the trustees' requirements - that is where we add value."
Similarly, I ask Broccardo if increasing internal investment management capabilities means OPAM will be less reliant on the services of investment consultants. "We will be doing more at the centre," admits Broccardo. "The style we have adopted with the consulting community is we work with them on a specialist basis."
One example is BUKRF's close relationship with Russell Investments on the selection of active equity managers. The process involves an alpha/beta split with BUKRF managing the beta side and working with Russell on the selection of long-only equity managers.
"That type of process has delivered good value for us and we will continue to adopt that going forward," Broccardo says.
Bringing it in-house
Broccardo explains it has taken more than two years for BUKRF to become comfortable with the centralisation concept. The process of centralisation began late in 2008 and into Q1 2009 when BUKRF spent time making sure it centralised the risk management of the fund by working on a projected cash flow and liquidity basis - a strategy, Broccardo says, served the fund very well during the financial crisis.
"By mid-2009 having control of the key drivers at the centre was a good thing to do. We believed the future was going to be more uncertain as we could see some of the big global imbalances were going to take a long time to work out," he says.
In reaction to this future uncertainty, the fund established a monthly dynamic asset allocation meeting with the trustees in addition to the quarterly investment committee meetings - and so began a more centralised and frequent flow of information and a top down approach to management.
Indeed, Broccardo says the DAA meetings "enabled us to make investments in leveraged loans during Q4 2008 at very good prices and we sold a lot of those out during the last eight months". On the whole, over the past three years the active strategies overseen by BUKRF's investment team added about £1bn to the scheme's £18.2bn defined benefit portfolio.
Broccardo explains there are three key parts to OPAM's structure, supported by a team of seven. An implementation team that deals with liquidity, risk analysis and stress testing; a manager selection side headed up by Andre Konstantinow, brought in from Morgan Stanley in August last year to work with large consultants and managers; and more recently Stergios Saloustros was drafted in from F&C Asset Management to head up the dynamic asset allocation concept - to have someone full-time focusing on the asset allocation overlay and hedging mandates.
Broccardo says in terms of appointements OPAM is likely to beef up the analytical fire power beneath its existing team in due course, although personnel expansion will depend on opportunities in the market place.
Broccardo adds: "It is related to the types of opportunities in the market we choose to prioritise and the skills that are available. We access a lot of analytical firepower from our underlying managers and consultants and I think we will be more thematic about how we create and delve into ideas."
Alternatives
"We have a huge white light shining on alternatives," says Broccardo. The BUKRF currently has 30% invested in alternatives - a mix of property, commodities, hedge funds and private equity - which leaves 50% for hedging strategies and 20% for equities. "That portfolio has done really well for us to capture upside and limit downside."
However, Broccardo says the portfolio is always under scrutiny to prevent the fund becoming complacent. "We are always challenging what we have today and if it is not right we are not shy of changing mandates," says Broccardo.
He adds: "It has done what we wanted and we want to make sure it continues to do what we want. It has been expanding over the last six months and it is opportunities driven as much as anything else."
FSA registration
OPAM has been registered with the Financial Services Authority which, Broccardo says, strips down the amount of relevant regulation to enable best execution to its one customer - the BUKRF - is easier to implement as there are no conflicts to manage.
Broccardo says: "We felt more comfortable as a group to look for a more formal structure that gave the in-house team FSA registration so it could more directly advise the trustee because as an unregulated entity you are very much working with other FSA registered fund managers or consultants. Having the FSA entity 100% owned by the trustee with its ‘own people' in it means it can advise the trustee like an asset manager or consultant more directly."
At present there are some 12 other pension funds - including Universities Superannuation Scheme and Hermes - with occupational pension scheme registration with the FSA and Broccardo suspects a few more funds will end up following suit by the end of the year.
BUKRF has added £1bn of value over the last three years so it is obviously doing something right and is poised to add to this success looking ahead by expanding on the top down approach.
"I would expect the contribution between top down and bottom up for value added to move more to the top down side - so more focus on our hedging strategies, liability hedging strategies and being more opportunistic about those hedging strategies," Broccardo adds.
"We think that is important because markets will remain choppy for the next couple of years."
