Sunday, 2 December 2007

Local authority pension funds as activists

This week I was down at the annual Local Authority Pension Fund Forum (LAPFF) conference in Bournemouth. Coincidentally it was taking place in the same week as the big Unite-T&G and GMB conference on the LGPS (see a report from that one here). The LAPFF has been promoting collaborative shareholder activism by local authority funds for over 15 years now, and deals with both corporate governance and CSR issues.

There were a couple of publications launched that are worth flagging up. First LAPFF itself launched a guide for trustees about mergers & acquisitions. This is intended to give trustees an overview of M&A activity and encourage them to engage with an acquirer if a deal looks potentially flawed. I think this is the first time that pension funds in the UK have been encouraged to really think about M&A and in my opinion it is long overdue. Remember the background to this is the systematic failure of many deals to create value (many destroy value) whilst at the same time often resulting in significant job losses. See for example the KPMG study quoted on page 6 of this NEF doc.

Secondly UKSIF launched a self-assessment tool for funds and an analysis of local government funds' practice in respect of responsible investment. You can download it from their website here. They have ranked local authority funds and only give one fund - the Environment Agency - top marks.

I won't give a detailed report of the conference as it would take a long time to write and probably be quite boring to read. So instead I will focus on the two bits I found most interesting. First was the session on behavioural finance related themes. This included a presentation from ex-DTI man Sheetal Radia and one from Rick Di Mascio from Inalytics. To massively oversimplify, Sheetal set out the theoretical background to behavioural finance, whilst Rick explained that some of its insights can be seen at work in the activity of fund managers. Again I'm simplifying but Rick said that fund managers were much less skillful at dealing with 'losers' in their portfolios than 'winners' which would seem to bear out the idea of loss aversion (as opposed to risk aversion). So it is interesting to see that behavioural finance can actually be of use to trustees, though I suspect we are long way from it happening on a significant scale.

Secondly the session on private equity was interesting because of how polarised it was. Basically there were four presentations in favour of it, and then a bit from Paul Maloney of the GMB criticising the role of private equity at the AA. I say the debate was polarised for two reasons. First, clearly the industry and the unions see the value or otherwise of private equity very differently. But more importantly, to me anyway, was the clear separation of the debate about private equity as an asset class, and debate about private equity as a public policy issue. There is very little overlap between the two areas and as such it makes for a very bizarre conference session. The discussion of PE as an asset class was all very positive, with much focus on the stellar returns. But this is, apparently, a different world to the mass redundancies and declining service highlighted by the GMB.

And when I thought about this more I remembered a good example of investors almost explicitly abdicating their role in the public policy debate. Back in the summer, the chair of the NAPF wrote a letter to the FT to say that the tax paid by the partners at PE houses was 'irrelevant' to institutional investors. At the time I simply thought it was a bit sycophantic, but it now strikes me as an odd stance to take. As a comparison, imagine if he wrote to the FT saying that it was irrelevant to investors how the directors of public companies paid themselves. Or, if you think PE firms are more like fund managers (I think they fall somewhere between the two but that's for another day) imagine if he wrote to the FT saying that the way that fund management fees work was irrelevant. I think most people would think these would be unacceptable stances for an investor trade body to take - why is OK in respect of private equity? So I think there really is a gap here for someone to develop a critical investor perspective on PE.

Finally, it is worth noting that over recent years there has been more involvement from unions, both as delegates and speakers. In addition to Paul Maloney from the GMB the similarly-named Paul Moloney from Nautilus (formerly NUMAST) spoke about health and safety. Also there has been quite a bit of involvement of the US unions who are of course much more active in the shareholder engagement world than we haave been in the UK to date. This year Scott Zdrazil from the union-owned Amalgamated Bank was also amongst the speakers.

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