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LGC’s regular special report

A good manager – whether in finance or sport – must be prepared to take a hands-on approach

Ethical investment has become an important catalyst for change

The BBC’s Justin Webb hosted the prestigious LGC Investment Awards 2010

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Investment and football managers have much in common – both must actively manage their teams, as ALAN LAYTON explains p8

The LGC INVESTMENT AWARDS 2010 are a celebration of financial excellence p13

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LGC’s regular special report

KERRY LORIMERSUPPLEMENT EDITORThis issue of LGC Finance comes at a crunch time for public finances and a crossroad for local authority pension funds.

The spending review was tough – tougher than many in local government expected – but at least councils can now knuckle down to the job of defining what the new landscape means for them and the services they will provide over the next four years and beyond.

Lord Hutton’s interim report into the future of public sector pensions has also heightened an already charged debate over the affordability of existing schemes.

The squeeze on the public sector has made the job of senior finance professionals more challenging than ever. In this issue, Jonathan Flowers and Alan Finch reveal the real skills needed by the new breed of finance director – and why people are saying no to the top job.

Also in this issue, Cindy Rose looks at how environmental, social and governance issues have become a positive force for change in the investment industry, with investors now firmly in the driving seat.

We also hear from Alan Layton about the approach taken by his fund to the selection, assessment and management of fund managers. The secret, he says, may lie in a more active approach.

‘‘ At least councils can now knuckle down to the job of defi ning what the new landscape means for them and the services they provide

environmental, social and governance issues have become a positive force for change in the investment industry, with investors now firmly in the

We also hear from Alan Layton about the approach taken by his fund to the selection, assessment and management of fund managers. The secret, he says, may lie in a more active approach.

issues have become a positive

investment industry, with investors now firmly in the

We also hear from Alan Layton about the approach taken by his fund to the selection, assessment and

ALAN FINCH and JONATHAN FLOWERS on why staff are shunning the finance director job p4

Contents

CINDY ROSE writes about how ethical issues have become an agent for change within the global investment community p6

Read LGC Finance again in February

xx LGC Finance xx Month 2010 LGCplus.com

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4 LGC Finance 2 December 2010

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To be a local authority finance director, you have to want to do it. Finance directors

must come from the pool of experienced and qualified accountants, so it’s a tightly defined supply.

Finance directors are reaching a peak of significance, and the jobs are getting tougher as the spending review bites. This makes succession planning for finance directors a challenge for local government, senior finance leaders in the sector and those who find and develop finance directors.

Veredus recently worked with the Society of London Treasurers to explore these issues for London, which may resonate more widely. We took confidential soundings from London finance officers just below director level to get their take on the potential skills gaps that hold people back, and also the “will” gaps: why people might not want to apply for that top job.

Top five skills gaps • Management of politics:

handling a political environment

• Having a broad, council-wide perspective (rather than specialist corporate expertise or knowledge of one department)

• Handling responsibility for the lead finance role

• Handling conflict through influence

Stepping upWhy aren’t more finance people applying for the top job? ALAN FINCH and JONATHAN FLOWERS find out what the problem is

• Strategic leadership (overview, not detail)

The issues aren’t about technical finance, but leadership, strategic overview skills and resilience. And these can all be learned, ideally on the way towards the top job and not during a hellish first year. We will make some suggestions on how to acquire these skills, but first let’s look at the top five reasons why senior finance officers think people find the finance director job unattractive.

Top five will gaps• Work/life balance• Not wanting to deal with

politics• Stress• Job security – seen as

vulnerable• Breadth of responsibility

Worryingly, these factors are all likely to become more significant in the current climate. Surprisingly, politics is seen as unattractive, given that local authorities are essentially political

‘‘ If people don’t realise that there is an extensive mutual support network, we may be missing or alienating some much-needed talent

organisations. The point was made that modern governance structures can mean that people now have to move a long way up the local government ladder before they are exposed to politics, which makes them nervous.

More encouragingly, much of the will gap seems to be about confidence, which suggests a partial solution in how we support and nurture potential treasurers.

The director of corporate resources roleIn many instances the section 151 role is wrapped up into a wider resources role. There is clearly a concern about stepping up to take on responsibility for a range of other technical professional roles, and a sense that the relevant skills and insights are not gained earlier on.

People are concerned about managing the conflicts between professional groups. It’s interesting that some of the finance professionals we spoke to said that if they were a director of corporate resources they would rather not be the section 151 as this would give them a better base of objectivity across the professions.

Is this a problem?Is this one of those “if you can’t stand the heat…” situations? Should we conclude that if someone doesn’t want the political limelight and pressures of the

top job, then that’s fair enough and they’re simply not right for the post?

Up to a point that’s true, but if people don’t realise the compensating benefits in terms of impact, or the extent to which there is an extensive mutual support network at this level, then we may be missing or alienating some much-needed talent.

What can be done?Here are some ideas for those aspiring to senior finance roles, or those who wish to encourage and develop them.

Attend cabinet and scrutiny meetings even when you don’t have a paper up: get a sense of how the politics works, and get a perspective on less financial items, or items for departments you don’t know as well.

Think seriously about how you build and sustain relationships of trust with

A lack of will is holding back finance officers’ progression up the ladder


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Stepping up

people – the basic principles are the same at any level.

Develop networks beyond finance. For example, the Chartered Institute of Public Finance & Accountancy and the Society of London Treasurers are very good at setting up networks for finance people. But understand what other networking groups exist, perhaps under the aegis of the Society of Local Authority Chief Executives & Senior Managers, the Public Sector People Managers’ Association or the Society of Information Technology Management. Get to know peers in other departments – find out what’s on their mind.

Set up a buddying or mentoring system between finance staff and a backbencher – the backbencher gets help with navigating the complexities of local government finance:

the finance person gets an understanding of the practical realities of life on the frontline.

At a wider level, those with responsibility for the finance sector might consider promoting the benefits of the finance director role, and offer opportunities for wider strategic management development. It is worth noting that the Society of London Treasurers is working with Deloitte to develop a programme for aspiring finance directors that will look well beyond technical finance. It is expected to run in early 2011.Alan Finch is deputy section 151 officer at Tower Hamlets LBC and chair of the senior finance officers’ forum at the Society of London Treasurers. Jonathan Flowers is a partner at Veredus and a former county council director of corporate resources

COMMENT DAVID DONORA Head of commodities Threadneedle Asset Management

Commodity investing has grown rapidly since 2000, with around $300bn of assets now invested mainly in passively managed vehicles. Yet we believe that the characteristics of commodity markets, and the technical features of commodity futures, suggest that an active approach can add significant value. This has been highlighted by the recent underperformance of passive vehicles, due to the inherent rigidity and transparency of commodity indices.

With index weights only adjusted once a year in December, a sharp increase in a single commodity price means an index can become overly exposed to that single commodity. Many commodities are also prone to short-term price spikes, which then quickly revert back. Price movements that generate significant positive returns during the year, which are not sustained into December, will therefore not be captured.

An active managed portfolio can adjust weightings regularly to maintain diversification and capture short-term price spikes. Active investors can additionally benefit from the fact that index weights are based largely on annual production metrics and do not factor in fundamental supply and demand or seasonal characteristics.

Commodity indices use prescribed buy-and-sell criteria, selling their long futures before physical delivery and buying a further contract. This process, known as ‘rolling’, can leave passive vehicles vulnerable to adverse price movements as they typically have to buy and sell futures at fixed times to track the underlying commodity index. Active managers have the flexibility to evaluate individual commodity markets on a daily basis, taking advantage of investment opportunities as they arise to generate performance.

Long-only commodity investment is just beginning to move from passive to active and we believe that in five to 10 years it will be dominated by active managers. The flexibility of an active approach, with its ability to exploit the many opportunities that regularly exist in all commodity markets, has the potential to deliver the types of returns investors are seeking from the asset class.

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Commodity investments

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The rise of environmental, social and governance (ESG)

issues in the investment arena over the past decade has been remarkable. Fuelled by hyper returns and easy money in the early 2000s, investors could afford to demand a bit extra from their investments – more resource into the “softer side” parts of the business, which used to be left to companies to nurture or neglect as they saw fit.

Investors began working together – almost as a countermeasure to the ethics-based approach to investing offered by the older, socially responsible investing (SRI) funds, which were designed to eliminate certain undesirable activities from an investment portfolio (such as gambling, pornography or tobacco production).

The boutique side of SRI evolved into a more generalised stance on broader, “extra-financial” topics to suit wider-ranging investment preferences. What was once a platform for activists advocating certain viewpoints (against animal testing, for example) has thus become an inclusive, well-organised agent for change within the global investment community.

This transition has been helped enormously by a number of different influences. First, are those aimed at persuading

Seeing the whole pictureThe ethical investment movement has become a catalyst for change, with greater accountability measures fuelling investors’ desire for sustainability, writes CINDY ROSE

companies themselves to improve their practices.

For example, legislation aimed at raising the bar for corporate governance best practice, particularly with regard to board responsibility and accounting transparency, has been embodied by the Sarbanes-Oxley Act in the US and the Combined Code in the UK.

Similarly, initiatives providing a blueprint for companies to report more accurately on aspects of corporate responsibility have given a boost to ESG, such as the Carbon Disclosure Project (CDP) which helps companies report on – and reduce – their carbon emissions.

The Global Reporting Initiative has also helped to standardise ESG reporting by providing a template for companies to give details on all aspects of corporate responsibility – from bribery to issues about suppliers and everything in between.

As significant as these pressures have been, a second type of influence has been, in a very short time, a particularly galvanising force for ESG around the world: the United Nations Principles for Responsible Investing (UNPRI). The message from this body is clear: it is the responsibility of trustees and asset managers to account for what their investments are up to.

The UNPRI, a network of international investors,

‘‘ While there will always be investors who are struggling to keep up with change, others will be looking at ways to make progress

Seeing the whole picture

armed with six core principles focused on putting ESG at the very heart of investment decision-making and ownership practices, has ignited and fed investors’ enthusiasm for taking sustainability issues seriously.

Suddenly, the power shifted away from companies – which were begged to be more responsible by investors – to the investors themselves, who can now require asset managers to give an account of their investments.


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COMMENT TIM BIRD Head, local authority business Goldman Sachs Asset Management

As Anna Troup from GSAM’s Global Fixed Income team discussed at the recent Chartered Institute of Public Finance & Accountancy pensions conference, the global financial crisis and its aftermath are bringing fundamental changes to the bond market.

These involve new risks as well as opportunities, and we believe fixed income investment strategies must adapt. Traditionally, local authority pension funds have allocated a portion of their portfolio to fixed income to manage risk and to generate income. However, we believe that more flexible fixed income strategies are going to be required in the future.

For most local authority schemes, traditional fixed income allocations tend to be benchmarked to indices dominated by government-sector debt, which provides very low yields.

While the yield on government-related securities is historically low, we believe the risks of owning these bonds has increased. Many developed governments are already running severe budget deficits and still face the difficult choice of increasing fiscal stimulus or risking slow growth.

There are, we believe, many sectors of the global bond market which offer a more attractive balance of risk and return potential

than developed market government bonds.

For example, emerging market sovereign bonds denominated in the local currency of issue offer substantially higher yields compared with their developed-government counterparts.

At the same time, many emerging countries offer stronger growth to support their debt, and budget situations that are growing and improving rather than deteriorating in the way we have seen with developed market government bonds.

Local authority schemes have already seen the benefit of investing in corporate credit, with investment-grade and high-yield corporate bonds offering yields in the area of 3.5% and 8% respectively. In our view, these yields more than compensate for likely default risk, and corporate balance sheet fundamentals are steadily improving.

We believe the less certain macro-economic outlook presents a new opportunity to add value from active management of interest rate, currency, sector and security level exposures.

And as Anna reminded us, for local authority funds seeking the traditional benefits of a bond allocation, we believe the new reality in global bond markets argues for a more flexible approach to fixed income investing.

Flexibility in fi xed income

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Seeing the whole picture

This pressure is being transferred back on to companies themselves, since Principle 3 requires signatories to “seek appropriate disclosure on ESG issues by the entities in which [they] invest”.

Obviously, the thinking is that positive change in companies will come along much more quickly and effectively if asset managers, who can act on the common interests of their clients, make a big enough fuss with companies. And the way to ensure asset managers make a commotion is for investors to make ESG considerations a requirement in the tendering process.

In September 2010, a study was conducted in the UK and elsewhere in Europe to find out the extent to which ESG is taken into consideration when pension funds and retail investors choose an asset manager. The survey found that, increasingly, potential clients require managers to disclose either their commitment to ESG in the investment process or their signatory statutes with UNPRI, or both.

It is worth noting that the principles are aspirational, and that, while the UNPRI asks signatories to incorporate ESG issues into their investment decisions, at no point does it tell asset managers how they should use the ESG information.

So, signatories to the UNPRI may still invest in

companies that produce landmines or cluster munitions, for example, or that turn a blind eye to the use of forced or child labour in their supply chain.

This action does not contravene the commitment set out by the principles, since the principles focus on knowing the risks. The evaluation of the severity of the risks is left up to the asset manager. But the assessment of whether the asset manager is evaluating risks effectively, and whether the manager is incorporating ESG factors sufficiently into the investment process is left up to the potential client.

Ultimately, investors are the ones propelling the rise in importance of ESG factors, and asset managers and investee companies are noticing. While there will always be investors who are struggling to keep up with change, others will be looking at ways to make progress.

There are many interesting developments yet to take place, such as how to discern the actual impact that ESG factors have on a company’s balance sheet.

But in the meantime, investors should keep in mind that they are very much in the driver’s seat on ESG. And that could mean that everyone – investors, asset managers, and companies, alike – reap the rewards. Cindy Rose is head of SRI research at Aberdeen Asset Management




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I am sure those of us who are trustees and who have active management as part of our fund

structure would like to have the equivalent of Sir Alex Ferguson at the helm – getting fairly consistent top performance over time.

We would probably settle for top quartile performance if we couldn’t get Sir Alex. However, like most Premier League chairmen, we are faced with difficult decisions about who to get in, what performance to realistically expect, how long to tolerate poor performance and what to do if they don’t perform. How decisive should you be? And on what basis do you make those decisions?

At Islington we have been considering these issues and have looked at approaches that are more structured and allow us to actively manage our managers. We wish to be careful and diligent selectors, and dispassionate, active managers of our managers.

Start out rightIt is stating the obvious that making the best selection decision at the outset is important. The question is how you get it right.

The “beauty parade” interview approach can introduce a certain amount

Managing the managersIf you want consistently high results, be prepared to roll your sleeves up and get active in your approach to fund management, suggests ALAN LAYTON

of bias. We may like a particular presentation team (even if they are not the actual fund managers). They may have impressive handouts, the presentation may be slick and a particular presenter may develop an excellent rapport with key trustees. None of this necessarily correlates with future fund performance.

Improving decision making For us, the first thing to do is to invest time with our advisers in the due diligence process. Officers and our advisers look at each long-listed organisation and conduct a full technical appraisal that will form the basis of a report, which recommends a suitable shortlist of organisations that are all appointable, highlighting strengths and weaknesses.

Second, we want the beauty parade to be focused on key issues relevant to the final decision. For example, what is the manager’s competitive advantage, and what are we buying?

All offerings have strengths and weaknesses. We want to explore these, and not only understand how good performance will be delivered, but also what conditions will limit this

Achieving consistent top performance requires strong leadership

‘‘ It is stating the obvious that making the best selection decision at the outset is important. The question is how you get it right

performance and in which markets their model will not perform.

Exploring this at this stage gives a more rational basis for considering future regular performance briefings.

What we want is honesty, and in that way we can make better decisions, both at selection and when monitoring performance.

Third, when we have reached a decision, the panel agrees and documents the reasons why a particular manager was selected.

Assessment of performanceNow we have been appointed with a clear rationale we want to effectively monitor performance. Our monitoring regime is broader than just performance of the fund. We look at:1. Fund performance, focusing on whether it is in line with expectations. Is it different to the performance expected in the market conditions explored at the beauty parade? Has a period of underperformance been sustained such that it undermines the confidence of the trustees?2. Our advisers’ ratings, to ensure that the original rating still holds. If it changes, has this reduced the likelihood of the expected performance

being delivered over the agreed timeframe?3. Any change in the strength on which they were appointed – for example, the loss of key people; an excessive growth in assets under management that may have an impact on future performance; or a change in the investment process.4. Any change in ownership. This could impact on staff morale and may lead to a loss of confidence over future performance expectations.


ALAM

Y

COMMENT LEN CURRIE Investment director Standard Life Investments

2010 has been tough for local authority pension schemes. Valuations show that many are facing deteriorating funding levels, while there is pressure to reduce costs. In these challenging times, local authorities must improve funding levels and deliver investment returns in a low-growth environment.

Traditionally, local authorities have relied on asset classes such as equities, bonds and property to deliver returns. While these have generally delivered over the long term, their performance is inextricably linked to economic growth. But as we entered recession, almost every asset class fell back.

As a result, a different solution is required – one that offers the potential for positive returns irrespective of economic conditions. Absolute return investing can meet this requirement through a truly diversified, multi-asset approach, encompassing both traditional asset classes such as equities, bonds and property, as well as more advanced investment strategies in interest rates (duration), inflation, currency and volatility. These can offer positive performance – regardless of economic circumstances.

Plus, while traditional investment strategies rely on the expectation that

asset prices will rise, absolute return strategies can make profits even when prices are falling. At Standard Life Investments we utilise a number of relative value strategies, including one that prefers US large-cap stocks to US small-cap stocks. Thus we will make money even if both markets are falling – as long as US large caps outperform small caps.

These factors have made absolute return investing an increasingly popular choice for institutional investors, but it has been available for some time. In 2005, we implemented an absolute return approach to improve the risk/reward profile of Standard Life’s own pension plan. Its success led to the launch of the Global Absolute Return Strategies Fund (GARS) as a standalone investment vehicle in June 2006, with a target return of cash +5% (gross of fees) over rolling three-year periods.

GARS has helped stabilise portfolios and enhance investor wealth in the financial crisis. Crucially, it has achieved this with volatility less than half that of equities. This shows how it is possible to achieve returns even in the most difficult economic conditions, and why an absolute return approach should be a consideration for local authorities now.

Absolute returns in a low-growth environment

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COMMENT LEN CURRIE Investment director Standard Life Investments

5. Any change in risk being taken. Is the risk excessive or not properly rewarded?

We believe that measuring performance should not be focused on a single dimension. An assessment of performance is made on a blend of the factors and should take account of market conditions.

We need optionsWhat to do if our monitoring criteria trigger the need for action? What are our options?

In the past, our trustees have been limited to signalling their dissatisfaction at performance presentations or through officers. The ultimate signal is, of course, dismissal, but there is no middle approach, and at the firing stage there is still a lengthy delay with a new procurement process.

We need more options. Our view is that we should select a bench of managers and have a passive multi-asset manager available.

In that way the trustees have the ability to impose a financial sanction, instead of just dismissal. A portion of the funds can be withdrawn from the manager in question and placed with one from the bench or placed with the multi-asset manager. This also provides more options for fund placement if a decision to fire is taken.

ConclusionFund performance is about long-term sustained growth and trustees taking a long-term view when making decisions. However, we also believe there is a case for active management by trustees of fund performance: rigorous selection, a multi-dimensional approach to performance assessment and taking action if needed. All of these will lead, hopefully, to regular top-table performance. Alan Layton is director of financial management at Islington LBC

In the third quarter of 2010 we saw strong returns from the UK conventional gilt market. This benefited from continued lacklustre economic data, increased confidence in the coalition government, and its safe haven status away from the problems afflicting the eurozone. In Europe, the divergence between core and peripheral bond markets continued. Core government bond markets rallied, continuing to benefit from safe haven demand, while tensions in the peripheries turned from southern Europe to Ireland, which needed a bail-out of up to €85 billion in November. However, Ireland’s problems did not totally eclipse southern Europe, with both Spain and Portugal suffering credit rating downgrades. Investment grade corporate bonds also performed well with returns supported by a combination of narrowing spreads and falling government yields. Financial and

high yield bonds and both loans and asset backed securities (ABS) also outperformed over the quarter.

US – quantitative easing plans unveiledFor the US economy, much of the data released over the third quarter unsettled the markets. The previously vigorous rebound in the manufacturing sector showed signs of stalling and there was a continued lack of confidence among consumers and small businesses. Weakness in labour market data gave financial markets further cause for concern. While some moderation in the manufacturing sector’s growth could be expected at this point in the recovery, the weakness in other areas of the economy was unusual given that this breaks with the pattern noted in previous recoveries.

Although evidence points that the US is facing anaemic growth rather than a double dip; in November the Federal Reserve unveiled plans to buy a further $600 billion of US government bonds in an attempt to strengthen the US recovery.

UK – challenges aheadIn the UK, the outlook for both conventional and index-linked gilts is more challenging. In the near term, yields are likely to stay low, if not move lower, amid the possibility of further quantitative easing. But on a longer-term view, gilts are looking fully valued. We do not believe that the outlook for the UK economy is as bleak as some would view, and that the UK will continue to expand at a 2% pace into 2011. Given this outlook, the current level of interest rates is probably too low; a factor which we believe will eventually negatively impact the market. In index-linked, investors may take the view that breakevens are currently at attractive levels, on the basis that highly indebted governments are more likely to tolerate higher levels of inflation.

Eurozone – dependant on global tradeFor mainland Europe, the recovery has also been sub-par compared to previous recessions. We have recently seen some improvement, particularly in core Europe where German manufacturing (buoyed by exports) is feeding through to

Fixed Income Outlook for 2011

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he last few months have been dominated by fears of a double dip in the US, the uncertainty of Ireland’s financial sector, and the possibility of further quantitative easing in the UK and US. However our outlook for the fixed income market in 2011 remains positive, with opportunities in

emerging market debt, credit and asset-backed securities prevalent. While we can see challenges ahead for the UK, there continue to be significant opportunities for selective investments.

employment and income growth. However the fact remains that many countries in Europe, including Germany, face material headwinds from fiscal tightening that will temper the recovery. Some of the peripheral European economies face more serious pressures as peripheral banks still require ECB financial support and government spreads remain wide compared to core governments. As for the bond market, we believe the most scope for further yield compression is at the longer end of the curve of core government bonds, as shorter-dated yields seem to be anchored at present levels. Medium and longer dated bonds are likely to outperform as investors move up the yield curve in search of higher yields. In peripherals, we remain cautious with our only overweight exposure in Italy, which has so far avoided the turmoil affecting Greece, Spain and Ireland.

Emerging Market Debt – local FX attractiveIn contrast to developed markets, growth in emerging markets remains impressive. Emerging debt markets have recently been subject to massive inflows - generally into local currency debt rather than external debt - and those inflows have created a strong technical dynamic. While the outlook for emerging markets is good, the technical picture encourages us to be selective in the short term. The recent strong demand has been as a result of investors’ concerns about developed markets and desire for the more attractive yields offered by emerging markets. However, on a fundamental view, there are many differing themes in emerging markets. During the credit crisis many emerging economies cut interest rates, but we are now at the stage where some have or are looking to reverse some of those cuts. For this reason, in certain emerging markets, local currency debt is attractive, but investors need to be selective, taking into account differences

in economic strength and fiscal and monetary policies. Volatility could increase in some areas as the threat of currency intervention materialises, while the low levels of US treasury yields may entice large amounts of issuance in the external market.

Credit – still offers valueFor UK and European credit markets, the general background is positive. Despite growth expectations being revised, this has had little impact on default forecasts, which are already at very low levels. For investment grade, issuance is likely to be plentiful during the final quarter of the year, but this is expected to be outweighed by strong demand as investors seek higher yields than available elsewhere. In high yield, we expect the market to continue to perform strongly for similar reasons, but with the added benefit that companies are increasingly issuing senior secured bonds, which rank higher in the capital structure than typical high yield bonds, thus attracting a broader range of investors. In loans, we are starting to see some new issuance coming through from private equity deals, though much of this is aimed at the US market. As with other areas of credit, demand generated by yield seekers means supply is well absorbed, and we expect to see spreads continue to tighten.

ABS – muted pipelineThe outlook for asset-backed securities (ABS) is also positive. Currently, senior ABS assets remain attractive on the basis of having low credit risk and carry in the region of 150-200bps over LIBOR. Taking a long-term view, we would expect to see some modest yield compression on senior ABS, driven by demand for low-risk floating rate instruments in a potentially rising-rate environment. In the near-to-medium term we expect spreads to trade in a narrow range, with the new issuance pipeline dictated by whether spreads are tightening

or widening. In mezzanine ABS, yield spreads continue to be very wide and attractive and we expect to see continued capital appreciation from these assets.

Award winning capability Insight Investment is an award-winning fixed income manager. Our highly regarded team employ a rigorous, disciplined and proven investment process. We have an established presence in the UK pensions market and continue to launch innovative new solutions and develop tailored, specialist bond mandates. Our capabilities cover the entire fixed income spectrum, including government, corporate and high-yield bonds, leveraged loans, asset-backed securities, emerging market debt and derivatives. We also have a comprehensive foreign currency capability.

Contact usFor further information or to discuss your investment needs, please contact:

Joanna Fidling Director, Local Authorities Insight Investment 020 7321 1498 [email protected]

Telephone calls may be recorded. Call charges may vary by provider.

Bonds – where next?

There is a great deal of uncertainty as to the sustainability of the recovery among developed countries, and this should provide a continued supportive environment for core government bond markets. Opinion is very much divided between whether economies are continuing to grow, albeit at a much slower pace than would be expected at this point in the economic cycle, or whether we are facing a more ominous slowdown. We expect economic activity to remain modest, but we do not believe that economies are facing a double-dip recession scenario unless there is further weakness in the US housing market. The decision by the majority of Western governments to initiate spending cuts to reduce budget deficits means that central banks are likely to keep monetary policy loose in order to avoid stifling the fragile recovery, including the possibility of further quantitative easing in both the US and the UK. This should help not only keep global yields at their existing low levels, but could also present the opportunity for further falls.

CURRENCY MANAGER

OF THE YEAR

OVERSEAS FIXED INCOME

MANAGER OF THE YEAR

10

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This advertisement is a financial promotion and is not intended as investment advice. The information provided within is for use by professional investors only and should not be relied upon by retail investors. The information provided may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When the investment is sold the amount received could be less than that originally invested. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Issued by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited and Standish Mellon Asset Management Company LLC are ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. CP5825-14-10-2010(1D).

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Excellence is celebratedLocal government finance experts gathered in London last week for the presentation of the LGC Investment Awards 2010. LGC Editor Emma Maier and BBC Today presenter Justin Webb were the hosts

THE AWARDS

Corporate Governance Award

Quality of Service Award (Pension Fund)Sponsored by Hymans Robertson

Quality of Service and Innovation Award Sponsored by Alliance Bernstein

Best Return on Direct Property

Best Return on Equities Sponsored by BNT Mellon Asset Management

Finance Director of the Year Sponsored by BNT Mellon Asset Management

Investment Officer of the Year Sponsored by Barings

Lifetime Achievement Award (Market)

Fund of the Year (under £750 million) Sponsored by T. Rowe Price Global Investment Services

Fund of the Year (above £750 million)Sponsored by Newton Investment Management

Fund of the Year (above £2 billion)Sponsored by Aon Hewitt

2.2

2.2

M&G brand identity guidelines September 2009

Our logo

The core brand values are represented within the M&G logo.

In its simplest form the ‘M’ and ‘G’ represent the company’s heritage, encompassing the gravitas, reputation and solidity that M&G are well known for. In contrast, the ampersand represents the flair which runs through the organisation. Used together this arrangement communicates heavyweight balanced with energy, originality and independent thinking.

Looking a little closer at the logo properties, colour is integral to the design. The use of fresh green for the ampersand helps to reinforce the core values of energy and individuality, whilst the blue reflects conviction, strength, solidity and respect for M&G’s long-term history. The typeface used for the ‘M’ and ‘G’ characters also helps to reinforce this in its clean, strong and structured nature.

The illustrative ampersand is symbolic of personality, energy and character, and is the core element in the logo. In contrast to the ‘M’ and ‘G’ this is created from a simple brush stroke, incorporating movement and dynamism and bringing the ‘M’ and ‘G’ framework together.

2 December 2010 LGC Finance 13

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COMMENT ANDREW MARKS Director, Head of UK and Ireland T. Rowe Price

Considering the surge in flows into emerging markets (EM), it may come as a surprise that the typical institutional investor is significantly underweight to EM equities. So is the typical global equity manager – which might be a bigger surprise, given recent performance trends:• Consultancy InterSec Research reports that EM and global equity mandates each accounted for less than 2% of US pension schemes’ total assets as of mid-2010.• The median global equity manager has an 8% weight to EM equities – well below the 14% in MSCI’s All Country World Index (ACWI)1.

UK trustees traditionally have been more globally diversified but here, too, exposure to emerging markets has lagged behind their rising importance.

Up to 80% of global equity managers remain benchmarked to the developed-only MSCI World Index, instead of MSCI ACWI2.

This has enabled many managers to benefit in performance terms from “off benchmark” EM allocations. But such allocations can quickly run up against constraints on active risk. Consequently, funds may find their EM exposure capped well below market weight.

We believe there is a compelling case for less constrained EM exposure in

global equity portfolios. The logic of global mandates argues for letting managers leverage their skills fully across regions and sectors.

An ACWI benchmark serves this purpose in three ways:• Bottom-up security selection: the ACWI contains 2,411 stocks to the World Index’s 1,657 – a 46% increase in the opportunity set.• Top-down bets and country diversification: adding the 21 EM countries to the 24 developed markets nearly doubles the possible country/industry combinations.• Tactical allocation: unconstrained managers can shift from direct EM holdings to indirect exposure via developed multinationals based on valuation or other factors.

We think the trends favouring EM equity – reduced sovereign risk, faster growth and structurally improved profitability – will lead to long-term outperformance.

1InterSec Research, 2010 Mid-Year Investment Industry Report2eVestment Alliance

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of November 2010 and may have changed since that time.

Emerging into the light

SPONSORED AND SUPPLIED BY T. ROWE PRICE. FOR MORE INFORMATION, VISIT WWW.TROWEPRICE.COM

A belief in “keeping it simple” has paid off for Bromley LBC, the winner of this year’s small fund award.

The fund credited its short-and long-term performance, described by the judges as excellent, to sheer simplicity and a policy of setting challenging targets for a balanced portfolio of trusted fund managers.

The fund, which has a total membership of 13,380, has four basic aims: 1) To ensure sufficient resources are available to meet liabilities as they fall due 2) To achieve this with employer contributions that are as stable as possible 3) To manage employers’ liabilities effectively, and 4) To maximise returns within reasonable risk parameters.

During 2009-10, the Bromley fund’s total value rose from £299.2m to £447.8m, an impressive achievement after the challenges of recent years.

Turmoil in the financial markets had led to the value of the fund dropping by

Simplicity pays off for this small fundFund of the Year Award (under £750 million) WINNER: BROMLEY LBC

16.5% in the previous year after five years of steady improvement.

The fund as a whole returned 48.7% in 2009-10 compared with a benchmark return of 41%, placing it second-best among all local authorities for the year.

Analysis of results at 31 March, 2010 shows that in the short, medium and long term Bromley has performed extremely strongly against other funds in the local authority universe, ranking respectively second, second, first and fifth over one, three, five and 10 years.

The fund, which has set a target of 100% funding by 31 March, 2019 hopes the final 2010 valuation will be able to increase the funding level while maintaining a similar period for recovery of the deficit.

If it succeeds, it will be among the few local authority funds able to maintain their position against a general backdrop of reduced funding levels and the lengthening of deficit recovery periods.

John DicksonHead of Investment Consultancy

Big may be beautiful, but nimble it’s not. So why tie yourself to a slow-moving articulated pensions juggernaut when there are swifter options available?

At Hymans Robertson, we can spring into action at a moment’s notice and help you respond to legislative and market changes in an instant. Plus, our independent status enables John and his fellow consultants to offer you tailored and, let’s be honest, frank advice you’re unlikely to find elsewhere.

So, if you’re looking for a free-thinking and innovative pensions and benefits consultancy that can help meet your objectives fast, give us a call.

020 7082 6267 www.hymans.co.uk/john

We know the best way to get you from A to B.

3-4 March 2011, De Vere Carden Park, near Chester

Re-building Strategy

Book your place at the registration desk during the conference to ensure you don’t miss out. Or to register later:

n Call: 0845 056 8341 n Email: [email protected] n Fax: 0207 728 5299

Online: www.lgcinvestmentseminar.com

The final report from the Public Service Pensions Commission is due before next year’s budget. By March we will have some indication about what this will mean for the Local Government Pension Scheme.

n EachlocalauthorityattendingtheLGCInvestmentSummitreceivesonefreedelegateplace(includingaccommodation)atthisevent

n Participateintopicalsessionstostayontopofthelatestdevelopmentsinthelocalgovernmentpensions’world

n Engageininteractiveworkshopsessionsfromourfundmanagersponsorswhichhelpunravelsomeofthemorecomplexsubjects

n Networkwithlocalauthoritycolleaguesandexchangeadviceandopinionsinthisrelaxedenvironment

n Hearaboutcurrenttrendsandviewsfromfundmanagersponsorsthroughouttheseminar

AttendingtheLGCInvestmentSeminar2011willhelpyouprepareforanddeliveryourresponsibilitiestotheLGPSwithgreaterknowledgeandunderstanding.

Who should attend:

n Localauthorityinvestmentofficers

n Localauthoritydirectorsoffinance

n Councillorswithpensionfundpanelresponsibilities

n Investmentcommitteemembers

Producedby:

Terry CrossleyHeadofWorkforce,PayandPensionsDivisionCommunities and Local Government

Nick GreenwoodPensionFundManagerRoyal County of Berkshire Pension Fund

Sally BridgelandCEOBP Pension Trustees Limited

Ian WoodallPension Vault

John FinchDivisionalDirectorJLT Benefit Solutions

Expert speakers include:

Please quote VIP code: L104-FS-AD when booking


This was one of the most hotly contested categories in this year’s LGC Investment Awards. The judges were impressed by the Cheshire fund’s proactive approach to the management of change, its excellent customer service and its strong investment performance.

Cheshire recognised well in advance the challenges that would face employers after the 2010 triennial valuation. It was one of the first funds to formally commission an interim valuation, sharing the results with employers in November 2009. By taking a positive approach, the fund gained an early warning of upward pressure on employers’ contribution rates, allowing adequate time to work through potential solutions.

It also provided the basis for innovative, employer-specific, risk-based modelling to stabilise contribution rates.

Cheshire has a highly diversified investment portfolio and has proved its

Well placed for future challengesFund of the Year Award (above £2 billion) WINNER: CHESHIRE PENSION FUND

willingness to innovate. Although it suffered losses during the financial crisis, it has sought to maximise returns and reduce risk, and posted strong returns against its benchmark in 2009-10.

As well as responding to market conditions, the fund has also recognised and mitigated the risks facing both the investment and administrative sides of the business.

Throughout the difficult period of local government reorganisation, it managed a significant increase in workloads and prioritised support for members and employers through employee packs, fact sheets and retirement seminars.

In every aspect of its work it has put the stakeholder first, placing a priority on the quality of communication, from its website to annual benefit statement.

Its proactive approach has ensured Cheshire is well placed to meet the challenges facing all Local Government Pension Scheme funds.

A successful long-term approach to investment has paid dividends for the Surrey CC pension fund.

In the past financial year, the fund achieved its best ranking in the local authority pension fund league table. Its return of 42.9% placed the fund into the top tenth of the local authority league table for the year.

Surrey credits its performance to a number of factors, including asset allocation and the stock selection of individual managers. The fund admits its hedge against currency movements attracted criticism, but says the hedge added value in 2009-10 and continues to do the job expected of it.

No changes were made in 2009-10 to the asset allocation of the fund or the managers mandated to run it. The bulk continues to be held in equities to produce the higher long-term results that should help minimise employer contributions; government and corporate

A long-term view secures successFund of the Year Award (above £750 million) WINNER: SURREY CC

debt and property provide diversification.

The overall structure of the fund, and all managers, remain under regular review.

There was a major change in the governance of the fund last year, with a new group of investment advisers put in place following the local elections in May 2009.

New panel members have undergone a comprehensive induction and training process in line with the Chartered Institute of Public Finance & Accountancy’s knowledge and skills framework requirements.

The actuarial valuation has been the main challenge faced by Surrey since year end, and the fund started work early on how it would respond to the results.

According to the judges, Surrey’s long-term approach to its investment strategy had paid off handsomely. That, together with training developments and engagement with key stakeholders, had secured the fund its success.

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Finance Awards



Phil Halsall, who has just been promoted to the post of chief executive of Lancashire CC, has been named finance director of the year for his achievements in transforming the way his authority does business.

Over the past 12 months, Mr Halsall has been the driving force behind a strategic partnership with BT, which is expected to save his authority £100m over the next 10 years. The partnership will change the way the council operates, focusing on customers as individuals and how it deals with them, as well as streamlining processes.

He has made significant improvements to the operational impact of the finance function, identifying the need for fresh opportunities and new skills instead of simply repeating the processes of the past.

He also changed the council’s approach to treasury management and pension fund investment in the wake of the Icelandic

Driving force behind changeFinance Director of the Year WINNER: PHIL HALSALL, LANCASHIRE CC

banking crisis. By bringing in a higher degree of market awareness, reducing risk and ensuring the risk the council does take is properly rewarded, Lancashire benefits from recurring savings of £9m.

Mr Halsall pioneered the identification of functions that could be developed on a commercial basis by sharing services with other councils. The first success was Cumbria CC deciding to have Lancashire run its pensions administration service when its current contract ends.

Mr Halsall’s achievements are all the more striking given the tough backdrop against which they took place: the council has implemented an equal pay review and faces the challenge of saving £113m over three years.

According to the judges, Mr Halsall has transformed his authority. “He has changed attitudes, introduced an appetite for innovation, and influenced changes on a council-wide basis,” they said.

The winner of the Lifetime Achievement Award goes to a man who brought more than two decades of professionalism and expertise to funds in the local government pension scheme.

George Henshilwood, who retired in March, was one of a new breed of specialist investment advisers and, according to colleagues in the industry, an institution in his own right.

Since joining Hymans Robertson in 1990 to establish its specialist investment practice, Mr Henshilwood gained a reputation for honest advice, a searing sense of humour and total commitment to his clients.

His focus on the practical application of investment concepts helped funds navigate the markets. He was also quick to spot the opportunity in UK property in the mid to late 1990s when others were distracted by the equity bubble in the telecommunications, media and technology sector.

A larger-than-life professionalLifetime Achievement Award (Market) WINNER: GEORGE HENSHILWOOD

His patience, pragmatism and sharp analysis won the loyalty of his many clients and the respect of the investment industry.

The Strathclyde Pension Fund is one of the funds to have benefited from Mr Henshilwood’s advice over the years. “He was very open and honest in his advice, making sure he told us what we needed to know, even if it wasn’t always what we wanted to hear,” says head of pensions Richard McIndoe. “George was larger than life in his dealings with us, which also made it fun to work with him.”

Peter Scales, public sector adviser and former chief executive of the London Pensions Fund Authority, says: “George has been a stalwart of the pension fund investment industry for as long as I can remember.

“His advice has been a driving force for rational investment by local authorities, and he truly deserves the lifetime achievement award.”

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COMMENT KAREN BROLLY Public sector actuary Hymans Robertson

The majority of authorities administering the Local Government Pension Scheme have a customer charter outlining the quality of service they are looking to achieve; it is encouraging to see that many include consistent themes around helping customers.

The cornerstone of quality of service is good governance – a topic that was given prominence last year in the Department for Communities & Local Government paper on the content and quality of governance compliance statements. However, governance and quality of service goes beyond the process of completing a compliance statement (which was the main focus of the DCLG paper) and, in our view, it encompasses:• Creating and maintaining a suite of policies including admissions, cessations, bulk transfers, communications, administration standards, discretions, funding strategy statement (FSS) and a statement of investment principles (SiP);• Clarity of scheme literature and good communication including annual member benefit statements;• Ensuring an understanding of all relevant parties through effective training;• Programme of monitoring and managing key risks, including investment, longevity and employer risk;• Being clear on the importance of good data

and continually improving the quality of scheme data.

With these key building blocks in place, an administering authority will be in a strong position to help the various stakeholders (including employers) to understand pension benefits and make the right decisions.

Quality of service is also about having clear and appropriate service standards, along with efficient methods for obtaining customer feedback and making improvements based on customer comments.

When the pace and frequency of change are increasing, the quality and diversity of services provided to stakeholders becomes more important.

With public sector pensions becoming increasingly newsworthy, it is vitally important that members can rely on administering authorities to provide them, in the most appropriate way, with factual and current information that allows them to see how any changes will affect them.

Concise, tailored and compelling written communications are important in achieving this, and the use of technology is also becoming integral with many funds successfully using their website as a means of supporting and assisting their stakeholders in a cost-effective way.

Quality in pension service

COLUMN SPONSORED AND SUPPLIED BY HYMANS ROBERTSON. WWW.HYMANS.CO.UK

Impressive levels of member satisfaction are a tribute to the success of the London Pensions Fund Authority (LPFA), winner of this year’s award for quality of service.

A survey found most members are happy with the service provided by the fund, with satisfaction ratings of 91% in the past financial year. Performance regularly exceeds 99% across a number of external contracts. The judges commented: “Very high standards of service are not only set but are achieved on a regular basis.”

The fund’s high approval rating stems largely from the introduction of a new workflow system that allows managers to control caseloads and carry out detailed reporting against service level agreements.

Processing time has been dramatically reduced by the development of a pensions administrations strategy, which uses online forms and a data-matching system.

The judging panel praised in particular the rigorous reporting process adopted by the fund to its staff, trustees,

Interaction leads to satisfaction Quality of Service AwardWINNER: LONDON PENSIONS FUND AUTHORITY

pensioners/contributors and employer bodies.

Weekly reports on performance are provided to managers, and quarterly reports are sent to the LPFA board. The judges commended the board report, which gives detailed performance information against programmes of work for its fullness and precision.

The fund has an array of member communications, including newsletters, annual reports and benefits statements, as well as a dedicated website. Following a review of communications for accuracy and clarity, existing material has been consolidated and supplemented with detailed factsheets, all of which have had a ‘plain English’ test by non-pension specialists.

Members are asked regularly for their views on the quality of service and communication they receive from the fund, and these surveys show satisfaction to be high. Where responses are less positive, these are taken on board to shape the fund’s priorities for the future.

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Investment Awards 2010


Quality of Service and Innovation AwardWinner: edinburGh City CounCiL insuranCe serviCes team

Creative thinking over a key tender saved one council more than £3m – and landed the team responsible this year’s quality of service innovation award.

The insurance services team in Edinburgh City Council’s finance department impressed the judges with its innovative approach to procuring insurance for council buildings.

When the contract came up for tender in 2005, the team actively contacted insurers that are not usually active in the local authority market to promote the opportunity and encourage them to bid. As a result, four companies submitted tenders, and the council saved £200,000.

When the contract was re-tendered three years later, a similarly proactive approach was taken. This time eight insurers submitted bids, and the savings reached £850,000.

The team also provide insurance services for partner organisations, saving around a third of its premium spend. It has also shared its expertise with another as a consultancy pilot – a service that is now being offered to other local authorities.

Shining examples set new standardsCorporate Governance AwardWinner: environment aGenCy

This year’s winner of the corporate governance award has been described as a shining example of good governance – and it continues to set new standards.

The Environment Agency impressed the judges with its support for best practice in corporate environmental governance and its place at the forefront of ethical investment. The fund measures the environmental impact of its investments and has achieved reductions on the benchmark set.

Responsibility for all pension-related matters has been delegated to a committee whose members benefit from a comprehensive training plan to ensure they have the skills they need.

In particular, the committee reviews quarterly the management of the agency’s governance, investment and benefits risks. Actions are identified and implemented promptly.

The agency’s activities are not limited to its own fund. It benchmarks itself against other funds, shares research into socially responsible investment, and publishes lessons learned from its tendering exercises so that others can learn from its experience.

Investment Officer of the YearWinner: innes edWards, edinburGh City CounCiL

An innovative approach to cash management has won a treasury manager at Edinburgh City Council the title of investment officer of the year.

Innes Edwards and his treasury team manage a cash fund of up to £450m on a low-risk, low-return basis. The approach taken by the team has protected the security of deposits through the credit crunch and turmoil of worldwide markets and handsomely beat both benchmark and average money market fund returns. Since its inception three years ago, the fund has generated just over £5.5m in additional interest compared with performance in line with the benchmark.

The team has also made innovative use of AAA-rated instruments such as treasury bills, and been involved in the negotiation of investment regulations covering Scottish local authorities.

Mr Edwards plays an important role in the wider treasury management world. He chairs the Chartered Institute of Public Finance & Accountancy Scottish Treasury Management Forum and is a member of the CIPFA Treasury Management Panel.

Issued by T. Rowe Price Global Investment Services Limited, 60 Queen Victoria Street, London EC4N 4TZ, which is regulated by the UK FSA. This material is not intended for use by Retail Clients as defined by the UK FSA. T. Rowe Price, Invest With Confidence, and the bighorn sheep logo is a registered trademark of T. Rowe Price Group, Inc. in the United Kingdom and other countries. This material was produced in the United Kingdom.

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