Quickfire pension Q&A with LB Islington

Richard Greening is chairman of the London Borough of Islington pension fund sub-committee and cabinet member for finance. His original background was as a local government consultant for the LGA.

Room 151: Why did the pension decide to invest in the Hearthstone residential property fund?

Richard Greening: Essentially because we had been looking at the performance of the investments we had and equity performance has been particularly disappointing over the past decade. So we were considering putting money into other assets.

If you look at things like the IPD index it is pretty clear that residential property has outperformed equities over that sort of period. So we should have investment there. Residential property also outperforms other types of properties and we do have other types of property but the performance of this kind of property just struck us as being too good to ignore.

Room 151: What kind of properties is the fund invested in exactly?

RG: It’s in a lot of new properties with some interesting development sites. It’s likely to be things like corporate lets, reasonably high quality, distributed around the UK, so it is a UK residential property tracker.

Room 151: Is there any of the property in your borough?

RG: Not yet no, some will be in London but it is unlikely to have a significant local impact. The decision was taken purely on the grounds of it being a good investment for the pension.

Room 151: There were headlines about it being investment in local infrastructure investment?

RG: Well sometimes it is included in infrastructure depending on what you mean by infrastructure. Residential property is a bit more granular than large infrastructure projects, so it is easier to get out of individual properties, a massive road or bridge or hospital is a lot harder to sell, but with individual residential homes clearly they can be bought and sold on the market so it makes the asset more liquid and reduces risk.

The point is though, that you can have investments in infrastructure which have economic benefits and could have a more local impact. If you look at the growth of the Manchester pension fund some of the investment there is also in the housing market, but within the Manchester area. We are interested in that more local approach and we have had conversations with other London pension funds about the possibility of setting up a London residential property fund.

Room 151: What sort of returns are you expecting and when was the fund launched?

RG: It’s too early to say on returns, the fund was launched quite recently, last year. They gave us to expect around 4% net on rents with some on top for capital appreciation of the properties, so that could add another three, four, five percent so that was quite attractive to us.

Room 151: You have invested quite a large proportion of the fund in overseas equities

RG: We have two global equity external managers, RCM and Newton, and we manage an in house FTSE tracker so there is quite a lot in equities at the moment because we have believed that those are the assets that are appreciating fastest and would help us close the deficit.

Room 151: But is the implication that you are moving away from that?

RG: I’m not disbelieving it but I think that if we can get at least a similar return from other assets we should consider spreading our higher risk, higher earning assets around a bit more. Having some in residential property makes sense to me.

Room 151: You have a proportion of the fund in private equity too?

RG: Yes we have a couple of private equity managers, it is a small but significant proportion of the fund. We believe there is more growth in smaller companies than larger ones so it makes sense to have assets in there. There is more of a liquidity issue there but we would be foolish not to have some exposure to that part of the market. The managers are Standard Life and Pantheon.

Room 151: Do you have a smaller proportion of the fund in bonds than most pension funds?

RG: Yes I think we do, we have more than the average in equities and less in bonds. As far as bonds go we just have corporate bonds.

Room 151: Do you consider this a more adventurous fund than the average?

RG: We’re still cash-flow positive so looking to maximise returns rather than having to worry immediately about matching liabilities. The fund is £800m and we have a small in house team headed up by Joana Marfoh in our finance department and we have advice from Allenbridge Epic and Mercer.