Quentin Marshall, chairman of Kensington and Chelsea's £1.9bn pension scheme, has delivered the best performance of any UK sovereign wealth fund over the past decade by parking half its assets in equity index tracker.
Marshall, who has been the fund's chairman since 2014, said stock or fund selection hinders rather than helps drive returns and he avoids making strategic decisions when his team meets to review its investments.
“All three of those things, postal risks and postal costs, certainly don't add value,” he told the Financial Times in an interview from his office in Mayfair.
“The entire asset management business is built on the premise that it has value,” Marshall said. He specifically withers about advisers who advise pension funds on investment decisions and “rely on retrospective data that has been shown to be completely useless and worthless as a source of forecasting”.
Over the past decade, the 51-year-old Conservative councilor and banker has delivered an annual return of 10.8 per cent on the Kensington and Chelsea council pension, which provides services to both the wealthiest parts of the UK and areas of significant deprivation.
The performance, driven by heavy equity exposure, outperformed other local authorities, according to shareholder advisory group PIRC. The Marshall Fund was the only local authority to double annual returns over the past decade. Second best is Bromley council, which followed with 9.3 per cent.
But Marshall is unlike many people who run public employee pension funds across the country. The Brompton ward councilor is also chief executive of private bank Weatherbys in Mayfair and previously held senior investment roles at Coutts and UBS Wealth Management.
Marshall says his performance is partly about making fewer decisions. His team formally meets to review strategic asset allocation once a year but “it hasn't changed for many years”.
Half of the fund tracks the BlackRock MSCI global equity index, although it has carved out global equity index exposure to exclude three companies linked to the devastating Grenfell fire of 2017 in Kensington and Chelsea. .
His rejection of funds and stock options makes him doubt that the UK government's decision to consolidate all the assets of England and Wales's £391bn of local government pensions will help to increase pension returns, although he supports the government's efforts to use the investment system.
Last month Labor Chancellor Rachel Reeves set out plans for a series of “megafunds” to manage local council pension assets, a move the government hopes will drive billions of pounds of investment into Britain's infrastructure and fast-growing companies. The reform program was championed by his Tory predecessor Jeremy Hunt.
But Marshall doesn't buy their argument that the reforms will lead to better pension returns for cash-strapped councils.
“This has a negative PPP approach to me,” said Marshall, referring to the public-private partnership that flourished in the late 1990s and early 2000s and was widely viewed as delivering cheap value to the public purse.
“All governments of all kinds have a great temptation to take away the best of the people. . . but if it was really an investment there would be no need for you to tell us to do it,” he said.
“Is this money to pay for pensions or is it a fund that can be used by the government. . . I think they are very tempted to change it from the former to the latter,” added Marshall.
The Kensington and Chelsea pension fund does not own any shares in infrastructure. Marshall said he was looking at infrastructure “shortly” but chose not to invest because of “too high manager fees, too little diversification compared to water security markets and too little compared to existing classes in terms of returns”.
As the government pushes for the consolidation of local authority pension assets, Marshall said it was “very important” that asset allocation decisions remain with local managers, as they are often responsible for ensuring pensions are paid. Different councils have different risk tolerances depending on the level of funding of their pension scheme, contribution rates and the demographics of scheme members.
The government has indicated that it will allow decisions on the “high level of strategic asset allocation” to remain with local councils, but has said in the presentation that it believes that the expertise in the pools puts them in a better position to take on the job.
“If you were to divorce the underlying asset allocation you would have a real problem – the accountability chain is very important,” Marshall said.
Kensington and Chelsea is in the process of building a property portfolio, with a target asset allocation of 75 percent in equities, 20 percent in property and 5 percent in index-linked bonds.
The council's scheme has a funding level of more than 200 per cent, which means it estimates it could pay out twice as much as pension liabilities.
As a result, pension payments have been reduced, freeing up more money for the council to spend on local services.
Although Marshall is sympathetic to the government's move to put investment decisions in the hands of councillors, who rely on the advice of pension advisers, he hopes the government will leave enough flexibility in the system for “sensible people” to disagree.
“Anything too strict and too prescriptive I think could lead to negative consequences and citizens need to be aware of this because it's a £400bn asset . . . this is real money that will have a real impact on whether your local library is going to stay open and your grandmother gets care appropriate,” he said.