UK coal pension cost study offers investment lessons
Investment costs are increasingly coming under the spotlight as it becomes ever harder for asset owners to squeeze out decent returns from their portfolios.
That is one key reason why Coal Pension Trustees – which manages the £21 billion ($27.5 billion) in assets of the UK’s two legacy coal industry pension funds* – recently completed its most in-depth analysis of total costs.
“It was the first time we went to that level of detail, and now we will report on it annually,” Mark Walker, chief investment officer of CPT, told AsianInvestor.
The analysis took 18 months and was a “Herculean task”, he said, particularly because of the high proportion of private market assets – around half of the funds' total AUM. Such assets are less transparent, making it harder to gather information on costs.
"Credit has to go to my colleagues in the operations and accounting teams," he added.
The team discussed the results for the 2017 figures in the fourth quarter of last year.
Walker said the analysis was a “fairly forensic exercise” that involved drilling down into regular fund management fees; partnership expenses, such as for private equity investments; performance fees and carried interest; and operating costs, especially for real assets.
Having a greater understanding of costs will impart benefits, he said, such as helping CPT to make better investment decisions and ensuring its general partners and real asset agents are managing the operating costs they control appropriately.
In his interview with AsianInvestor, Walker went into detail about what the process involves and why it is so important. He noted how some expenses covered operating costs that are not paid to the asset manager. And some costs are harder than others to check and assess.
“Ultimately we need to understand our net return and our net income yield,” he said.
“If you look at a real estate or infrastructure portfolio, you might have a gross yield on your portfolio, but that might not be the rent that you receive because there are other operating costs.
“If you buy and sell a property, there may be a tax,” Walker added. “There’s depreciation and maintenance; those things cost money. Plus we own some ships; we have to pay the crews.”
“So first there is transparency of cost; second, management of costs; and third, making sure that costs are always a part of an investment decision – the risk-return cost equation,” he said.
On top of that, the cost must be appropriate for the type of investment, Walker said. “It has to be competitive; it has to be appropriately structured.”
The cost-analysis project was driven partly by the need to make CPT’s assets work harder, Walker said. (Indeed the institution is looking at other ways to boost returns, such as investing more in emerging markets such as China: it recently chose two asset managers to run its first allocation to A-shares.)
The exercise certainly taught CPT more about its operating costs, some of which are not within its control, he noted. As a result, the fund needs to make sure our asset managers are managing them appropriately and also that they are properly allowed for in the expected returns framework.
Hence, “this level of cost detail helps us make better investment decisions”, Walker said.
That is more key than ever now, and something Asian institutional investors should be equally keen to improve on, especially as private market assets are in such high demand, despite their relative opacity in terms of valuations.
Ultimately, in a lower-return world, costs as a proportion of value-added should not increase, Walker said. Yet if there is a wall of money flowing into, say, private equity, it’s a challenge to bring costs down, he said.
“If supply exceeds demand,” he added, "there is not much incentive or pressure for managers to reduce their charges."
* The British Coal Staff Superannuation Scheme (£9.5 billion) and the Mineworkers Pension Scheme (£11.5 billion).