Hugh Grover of London Councils will provide an update on the London Collective Investment Vehicle and discuss the mechanics and the timetable for the launch.
Minutes:
5.1 Hugh Grover (Chief Executive, London Collective Investment Vehicle, London Councils) gave the first half of a presentation on progress on the London Collective Investment Vehicle (CIV). He advised that the London CIV included 30 London boroughs and the City of London Corporation. The CIV had been formally authorised in October 2015, and it had received its first wave of funds amounting to £6 million that had been authorised by the Financial Conduct Authority (FCA) on 13 November. Hugh Grover advised that the first sub-fund had been set up operating on active global equities and eight other sub-funds would be set up early in 2016, including three passive equity funds. The CIV had discussed the possibility of appointment with 20 fund managers and four fund managers currently were appointed to work with the CIV, with most of the remaining 16 fund managers expressing their wish to work with the CIV. Hugh Grover added that it was hoped that the two remaining London boroughs would join the CIV.
5.2 Julian Pendock (Investment Oversight Director, London CIV, London Councils) then addressed the Committee. He began by explaining the governance structures in place, including segregated mandates and pooled mandates. Members also heard about factors to consider in respect of fixed income. Julian Pendock then turned to infrastructure and emphasised the significant value adds that could be gained through larger economies of scale. The CIV also needed to take into account issues such as the changing nature of the infrastructure market.
5.3 During Members’ discussion, details were sought about the steps that would be taken to minimise transactional costs. It was commented that aggregating fund managers was the right strategy for the CIV to take which would mean reducing costs, whilst local authorities participating in the CIV would not need to change fund managers. A Member commented that it would be advantageous if the CIV invested in UK commercial property on a larger scale and he enquired whether there were any plans to do so. In noting the aggregating of fund managers, he commented that they were still accountable to the decisions they made and he asked whose role it would be to monitor fund managers, adding that the Council should also undertake its own monitoring.
5.4 In reply, Hugh Grover advised that the CIV had been working hard with fund managers to reduce transactional costs, however there was probably not much more scope to reduce these costs further. One fund was also affected by stamp duties in Dublin and discussions were taking place as to how to address this. Hugh Grover advised that there were future plans to invest in commercial property, however the immediate priority was to firmly establish the CIV. He commented that there were diverse property and infrastructure portfolios across the London boroughs. Investment in equities had been chosen for the launch of the CIV as it was felt that a simpler area of investment was beneficial at this stage. Julian Pendock confirmed that it was his role to monitor fund managers’ performance on behalf of the CIV. The Chairman added that the Council would continue to monitor fund managers’ performance and this would be reported the Committee as well as the CIV’s monitoring. He commented that fund managers were incentivised to work with the CIV because of the increasing role it would play in making investments on behalf of councils.
5.5 Members enquired whether the CIV would be looking to invest in large infrastructure projects and if so at what stage would it start to benefit from such investments. A point was raised as to whether higher charges would need to be imposed as the CIV grew and became more complex. A Member commented that there was an element of risk in investing in areas that were not fully understood and expressed concern about investing in new, large infrastructure projects, particularly in respect of the danger of underestimating costs. He also enquired whether the CIV would be considering investments in private markets.
5.6 In reply, Hugh Grover advised that it was the decision of the participating London boroughs as to whether to invest in large infrastructure projects. He commented that if a group of London boroughs wanted to invest in particular infrastructure projects, then the CIV could do this on their behalf. In respect of costs, he explained that there were both service charges and fees applied across the Fund as a whole. A comprehensive analysis would need to be undertaken to predict costs and the CIV would be liable to Corporation Tax, however every effort would be made to minimise the costs of the CIV fund. Hugh Grover stated that it was hard to predict how the CIV would grow and this would be at the discretion of the London boroughs.
5.7 Julian Pendock advised that in terms of fixed income, there was considerable fragmentation amongst the London boroughs and so these sub-funds would remain smaller compared to others. The CIV also needed to focus on areas such as interest rates and it would consult extensively with the London boroughs in order to minimise risks. Julian Pendock emphasised the benefits of London boroughs co-investing and sharing costs. He also stated that the CIV would be looking at possible investments in private markets in the future.
5.8 The Chairman sought further details on the cost savings that the CIV would make, including examples of these. He commented that fund managers fees were large in comparison to other fees and asked whether there would be a future report outlining the cost savings the CIV would make. The Chairman asked how fund managers were reacting to the steps being taken by CIVs and whether non-London councils could join the CIV. Another Member enquired what would happen in situations where the CIV had made a collective decision and some London boroughs had subsequently dissented.
5.9 In reply, Hugh Grover commented that there should not be an excessive focus on fees savings as the CIV would also bring benefits through larger economy of scale. He suggested savings of around 50% on sub-funds and around 65% on index funds as estimated by Deloitte could be achieved, whilst other savings would also be made through joint procurements. Hugh Grover commented that although other CIVs had quoted some significant savings, in his view these were hard to justify and a benchmarking exercise amongst CIVs needed to be undertaken. The Committee noted that of the 20 fund managers the CIV had been in discussion with, many of the 16 who had not been appointed were now re-engaging with the CIV and some were offering fee savings of around 50%. Hugh Grover advised that where a London borough subsequently dissents from a decision by the CIV, this would be considered by a Joint Committee and every effort would be made to find common ground.
5.10 Members welcomed any attempts to encourage non-London councils to join the CIV which would increase economies of scale and drive costs down and expressed their approval of the work undertaken by the CIV to date.