LPFA wins big with Buffet-style stock picking
0There is a vicious cycle where some clients are getting rid of their asset managers if they underperform for two quarters, which in turn makes managers more short term in their pursuit of returns.
Alpha generation is alive and well within the Local Government Pension Scheme, with one internal manager celebrating an equity return of 43% over the past two years – almost twice the benchmark return.
The performance, revealed in the LGPS pooling submission to government by the Local Pensions Partnership , has comfortably beaten the MSCI World Total Return Index, which rose a relatively modest 11.78% over the same period (22.4% over the two year period).
The London Pension Fund Authority’s Internal Equity Strategy (which will now be operated by the LPP) currently stands at £933m, rising 27.96% in the past year.
Richard Savage, investment manager at the LPFA, told Room151: “I wouldn’t pretend we invented the style – we were inspired by the approach of Warren Buffet and Howard Marks.”
He said that the strategy is based on a low turnover, concentrated portfolio of large cap equities, listed on developed market exchanges.
“We are looking at companies with sustainable competitive advantages in their markets, high returns and high cash flows.
“It isn’t just good enough for them to have free cash flow today – we look at how the companies invest it to compound their performance.”
The portfolio was established in 2014 with just four stocks and has now risen to 24, with the largest holdings in Johnson & Johnson, Nestle, Accenture, Alphabet and British American Tobacco.
Adopting a buy-and-hold strategy has meant that only two holdings have been sold in the past two years, Savage said.
The strategy also managed to ride the volatility in UK markets caused by the Brexit vote, due to its global diversification, according to Savage.
He said: “I think why it has worked is that the returns available to longer term investors are still there.
“A lot of active management has become more and more short term. There is a vicious cycle where some clients are getting rid of their asset managers if they underperform for two quarters, which in turn makes managers more short term in their pursuit of returns.
“However, there are a few longer term managers that have a good portfolio and are prepared to sit tight through the dips.”
LPFA’s pooling partners, Lancashire County Pension Fund and Royal County of Berkshire Pension Fund are likely to take holdings in the portfolio, Savage said.
The figures cited by LPFA on its returns are as yet unaudited.
