Railpen, the UK’s rail workers’ pension fund with £34bn (€40.5bn) in total assets, said it takes a holistic approach when selecting external managers, focusing on fit over performance.
The pension scheme started building its internal management capabilities around 2014 and launched its first equity strategy in May 2016.
Since then, it has added property and UK government bonds to its internal capabilities.
Craig Heron, director of public markets at Railpen, said: “The reason we did this was because it made sense, we can do that on a cost-effective basis. Where we don’t manage things internally is where it doesn’t make sense.”
He pointed out that Railpen awarded a large credit mandate to Neuberger Berman back in July 2023.
“This [investment] would take us probably 50 people to do it properly, and our entire investment team is around 50 people. That’s more than doubling the investment team and even then you could argue that might not be enough people,” he explained.
“We run things in-house where it makes sense. We are agnostic as to how we implement [strategy]. We try and do what we think is best for our clients at the end of the day, if it’s worthwhile doing it yourself we will do it, but if we don’t, we will use external managers,” he said.
Kunaal Vora, head of external management oversight at Railpen, added that Railpen takes a “very holistic approach” to external managers.
He said that, first and foremost, it is looking for investment expertise in the space it wants exposure to.
“We want to know that the manager has relative requisite expertise, the right experience, right teams, right ethos and the right philosophy of how we would like to invest in that [asset].
“We’d want to see that either mirrored or complemented by a partner that we choose.”
Other than experience, Vora said, Railpen looks at how the manager can “service us and service our member base as their client”.
He continued: “They have to look at our portfolio and our mandates in terms of the portfolio context […] We want them to look at that mandate in the context of the wider growth fund or the wider pooled fund, rather than a standalone mandate.”
Heron used Neuberger Berman’s £2bn credit mandate, which sits as part of Railpen’s multi-asset portfolio that is run internally, as an example.
He said: “We run pooled funds to try and achieve economies of scale. Even though we are one industry scheme, we have 107 different sections, and we allocate through pooled funds.”
He said Railpen’s growth fund, with £23bn in assets, is the scheme’s most diversified fund, with a 65% equity exposure. Neuberger Berman’s mandate is worth 10% of the total fund but the selection process was “quite interesting”, he added.
“From going through our selection process and really talking through the onboarding process […] we are calling out a certain element of their portfolio because it’s multi-sector credit. They have exposure to securitisation, investment grade, high yields, emerging market debt – all as part of this portfolio.
“That’s what we want, but it was one specific part of the portfolio that was, in our opinion, too diversified.”
To amend this, Railpen had “detailed discussions” with the portfolio manager to say: “We don’t need 200 names in this part for the portfolio [which is worth] 10% of our overall portfolio and we need to take more risk.”
He said that ultimately the manager found the feedback “helpful”. However, he stressed that Railpen would never impose on a manager to invest in a way that makes them uncomfortable, but ultimately it has to work for the fund.
Vora, who previously worked for Stonegate Fleming as an investment manager on the firm’s fixed income team and at S&P as an investment adviser, said that Railpen’s procurement process is not any more stringent than others.
He said: “Our focus is on what we believe would be the best fit for Railpen. So when we go through our exercise of selecting or sourcing, even a manager list, we are looking to see the key characteristics that we think would come through to a manager relationship that’s going to be more beneficial to us as Railpen as a whole.”
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