Chris Hitchen comes across as a more than suitable chief executive of Railway Pension Investments.
He may not be a trainspotter, but he is more than happy to rail at accepted practice across the investment industry.
Railpen, which manages more than £20bn of pension assets on behalf of 350,000 current and former UK rail employees, has embarked on a dramatic transformation to manage more money in-house and shunt many of its external managers into the sidings.
The impetus for change has largely been dissatisfaction with the service provided by fund managers, particularly their fees.
“We feel that the City has found reasonably good ways of getting money out of pension funds over the years, and moves to ever-increasing complexity have facilitated that. We have stepped back and said, ‘What are we getting for that?’” says Mr Hitchen, a past chairman of the National Association of Pension Funds.
“What we are getting billed is far less than is being siphoned off underneath.”
Railpen’s own analysis suggests that in addition to the £70m a year it pays in upfront, disclosed fees to asset managers – equivalent to around 35 basis points of its assets – it is paying an additional 300-400 per cent of this £70m in underlying fees.
“The pendulum has swung too far [in favour of the investment industry rather than investors] and it needs to go back the other way,” Mr Hitchen says.
The problem is particularly acute in illiquid asset classes, such as private equity and venture capital, where Railpen found the underlying fees to be most egregious.
“There was a piece in the FT recently, saying private equity managers are now the biggest payers of fees to investment banks. We want to have some of that money,” says Paul Trickett, formerly a senior figure at Goldman Sachs Asset Management and Towers Watson, and ex-chief executive of the British Coal Pension Scheme. He has been drafted in as Railpen’s chairman.
Mr Hitchen says Railpen is determined to find better ways of accessing private equity. “It is leading us to models that have more co-investing, more direct investment and frankly fewer investments in diversified funds,” he says.
And that may not be as far as Railpen goes: it is even looking at the possibility of creating its own in-house private equity funds.
This is symptomatic of Railpen’s new approach. A year ago it drafted in Roger Urwin, global head of investment content at Towers Watson, to oversee its Investment Transformation Project, a “vigorous exercise to question our investment beliefs, a lot of things we had taken for granted in the past”, says Mr Hitchen.
In the wake of this, Railpen’s trustees agreed to scrap their investment committee, “a brave decision in many ways”, and create a professional board chaired by Mr Trickett.
“In the past we found it easier to appoint more and more managers in the search for alpha [market-beating returns] and ended up with a very long list,” says Mr Hitchen. “Now we are consciously saying, what are the return drivers and how do we access them?”
That access may still include outsourcing to external fund managers, but increasingly it means buying individual stocks and bonds directly, cutting out the middleman.
Mr Hitchen is keen on directly targeting so-called “alternative beta”, with evidence seeming to show that a portfolio skewed towards value, high-income or low-volatility stocks can outperform a basket of equities weighted by market capitalisation over the long term.
“We think [alternative betas] are better ways of accessing what investment managers regarded as their secret sauce, but is not really secret,” he says.
Despite all the hype around alternative beta, Mr Hitchen says the amount of money invested in it remains “trivial”. However, Railpen has already diverted a fifth of its equity holdings to the concept, which is now likely to be extended to alternative asset classes.
About £13bn of its assets have been consolidated in an internally managed diversified growth fund. The approach has improved flexibility and created a wider investment remit.
For instance, Railpen is targeting a 4 per cent allocation to direct lending, which it believes offers “attractive yields”, yet did not sit easily in a more constrained, fund-based approach.
Perhaps unsurprisingly, Railpen has had to bolster its headcount to handle more internally. It now has around 50 investment staff, a figure it is looking to increase, compared with “about five people when I joined 15 years ago. The world has become more complex,” says Mr Hitchen, who argues the expansion has still been cost effective.
According to Ciarán Barr, Railpen’s investment director, the nature of these employees has also had to change, from those versed in manager selection to “more multi-asset people and people who can build investment models”.
Railpen will attempt to outperform inflation by 4 percentage points a year over 20-30 years, which Mr Hitchen describes as “challenging” but “not untypical for a sovereign wealth fund”.
It can afford to focus on a fairly punchy growth target, rather than managing its assets in relation to its liabilities, because around two-thirds of Railpen’s members are in sections that are still open to new recruits, something now vanishingly rare in the private sector.
Indeed, Railpen is a curious beast. What was once a single-employer scheme became a multi-employer one overnight with rail privatisation in 1993. The scheme now has around 110 sections with some, such as those for contractors and caterers, closed to new members.
Railpen also stratifies employers by the strength of their covenant, Mr Hitchen says. If they are deemed “good for the money”, their section can be run on a long-term funding basis, where deficits are acceptable from time to time. If they have “a more tenuous existence”, that section must be funded on a more onerous buyout basis.
Because of this, Railpen says it does not have an overall funding level, but that the bulk of its sections were between 80 and 105 per cent funded as of 2013, meaning the average section “has a small deficit”.
Despite this, most of its employers want Railpen to go full steam ahead to attempt to close the gap, rather than playing it safe.
“We have reasonable pressure from clients saying we want to take more risk rather than less,” says Mr Trickett.
Total pay £514,000 (2013)
Education 1986 BSc in mathematics, Durham University
1991 Fellow of the Institute of Actuaries
Career 1986-98 Principal consulting actuary and investment consultant, Aon Hewitt
1998-2004 Investment director, Railpen Investments
From 2004 Chief executive, RPMI and Railpen Investments
2004-06 Chairman, NAPF investment council
2007-09 Chairman, NAPF
From 2010 Trustee member, NEST
From 2011 Director, Pensions Quality Mark
2012 Advisory board member for Professor Kay’s review of short-termism in the UK equity market
Railway Pension Investments Limited and Railpen investments
Founded 1965 (as British Rail pensions department)
Assets under management £20bn
Offices London, Darlington, Coventry
Ownership Wholly owned subsidiaries of the Railways Pension Trustee Company Limited (the trustee for the 350,000-member pension arrangement for UK rail)
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