Big UK pension fund eyes QFII allocation

RPMI Railpen Investments, manager of the UK’s £17 billion ($27 billion) Railway Pensions Scheme, is considering applying to China’s securities regulator for a QFII licence to invest in onshore equities and bonds.

The scheme was born out of industry privatisation in 1994. It has a trustee owner and investment sub-committee that sets strategy for most of its 100+ rail industry sections, encompassing some 200 employers.

The scheme is defined benefit, with a number of sections open to new members, although it has a growing defined contribution segment, which amounts to about £1 billion now.

RPMI Railpen manages 12 pooled funds broadly by asset class with different risk/return characteristics, including a return-seeking pool and a defensive pool (bonds and cash). The largest single asset pool is its £5 billion active public equities pool.

Keith Shepherd is CIO and has an in-house team of 20 based in London who select and blend external managers and apply tactical tilts. Its public equities pool, for instance, is run by three staff and contains 15 managers. RPMI also has a big pension admin business with about 250 staff.

Although Shepherd confirms that RPMI Railpen's asset allocation has become slightly more defensive over the past few years, he says it has also been prepared to buy things like emerging market debt. “We recognise that is an attractive diversifying asset,” he notes.

He describes the firm as quite aggressive on emerging markets, which he says is a strategic long-term bet. “Emerging market equities have lagged over the shorter term and maybe it is a good time to be increasing exposure,” he says.

Shepherd confirms that RPMI Railpen is mulling applying for a qualified foreign institutional investor (QFII) licence to cover onshore Chinese equities and bonds. Up until this point it has taken a tactical approach to investing onshore in China via other institutions’ quotas, as well as H-shares.

“China is massively influential and will continue to be an important source of returns for us,” he says. “We want to try and pick a good entry point and price and accept that we will be in there for a long time and it will be volatile. We do not have a problem making a long-term commitment.”

He tells AsianInvestor that RPMI Railpen plans to invest in both the onshore equity and bond markets to give it greater flexibility. Asked which manager it might hire, Shepherd confirms that is under discussion but declines to comment further.

Railpen has been increasing direct investments, too, entering seeding programmes with hedge fund managers. It has also been gaining exposure to Asia and particularly China via private equity.

Having moved away from investing in fund of funds on the private equity side after hiring internal resources, Railpen is doing the same on the hedge fund side and now has two staff.

Shepherd estimates that RPMI Railpen’s portfolio covers 200 external managers (including 120 in three fund of hedge funds). “As we build our direct hedge fund programme, that number will fall dramatically,” he adds.

But in terms of the core relationships that the CIO really needs to know in depth, he estimates it would be more like 40-50 managers.

“You do have to bear in mind the complexity in your governance and your ability to manage that and the cost of doing that,” he adds. “But we have been much more successful using specialist [external] managers, so that is a route which is likely to continue.”

Asked what RPMI Railpen views as essential in an external manager, he firstly names a consistent investment process. “There are times when a process ought to be out of favour and a manager should be underperforming,” he notes. “If they’re not, I should be worried about it.”

He argues that the most successful processes are built around core, stable teams with the key people committed and tied in. He says a manager’s interests have to be aligned with RPMI Railpen’s, adding that he is prepared to pay for strict capacity control.

“I want it to be more profitable for a manager to perform for me than to get another pound of money to invest for someone else,” Shepherd notes.