EUROPE NEWS: Mandate of the future

Last month, one of the mostly hotly contested mandates reached a conclusion when England’s Environment Agency Pension Fund (EAPF) picked The Townsend Group to help it achieve a £240 million (€281 million; $365 million) tactical asset allocation to international real assets.

As EAPF revealed, the field was big. A total of 25 formal expressions of interest were made, and the 13 highest-weighted managers according to a scoring system were invited to tender. The scoring was based on eight factors: organizational quality, management team, investment proposition, management process, track record and pipeline, ESG capability and integration, terms, reporting and client servicing, fees and costs.

According to some with knowledge of the process, BlackRock, Partners Group, Credit Suisse, Franklin Templeton, Russell Investments and Aviva Investors, which was the incumbent real estate advisor, were among those interested. B-Finance and Mercer evaluated the submissions alongside EAPF officers.

EAPF, which manages some £2.1 billion in assets, decided last year that it wanted to develop a global portfolio of real assets, comprised of property, infrastructure, forestry and farmland. Property was the only asset class the agency pension had invested in previously, so the other three are new to it.

In the end, EAPF chose Townsend, which has discretionary mandates for other clients in each of the four asset classes. Still, even for Townsend, it was the first time it had won a discretionary mandate to invest in all four real asset classes.

Mark Mansley, investment manager at EAPF, told PERE: “There has been a lot of interest in the mandate. We have been given the impression that it is considered a ‘mandate of the future’ to have a tactical allocation across the four asset classes. We see lots of advantages in giving one manager the flexibility across different areas.”

Mansley explained that one advantage was that Townsend could invest in certain of the asset classes at any given moment, depending on how ‘expensive’ or otherwise an opportunity looked. “Times change and opportunities change, so for a manager to say ‘Well, this area is looking a bit expensive, but there are interesting opportunities over here’ gives us a real sense of added value,” he added.

According to a briefing sheet, the average return expectations are 4 percent to 6 percent above inflation, net of fees and costs, via assets with a broad geographic and sector exposure and variable maturity and vintage. In addition, EAPF said it wants medium- to long-term risks significantly lower than that of equities, with a capital preservation element desirable. The investments also should be substantially backed by tangible physical assets with reliable annual cash flow and limited operational risk and economic exposure.

Some £60 million of property that Aviva Investors has been managing will transfer to Townsend to form the initial base for expansion, but EAPF said most of the expansion will be into the three new asset classes of forestry, farmland and infrastructure at the expense of public equities and cash investments over the next two years. There also will be an international component and, in terms of real estate, Townsend has the discretion to make investments as it sees fit into areas such as property debt. Opportunity funds, however, are not expected to form a core part of the expanded portfolio.

Adam Calman, a principal at Townsend in London, called the assignment an “innovative” and “fully diversified global real assets mandate,” adding that the firm recognized the “significant opportunity to partner with the agency in raising awareness and adoption of environmental and sustainability practices across the asset classes.”

Indeed, the ESG component of the mandate was spelled out in detail by the agency in its tender document, with EAPF saying it had a preference for energy efficient buildings, renewable energy projects, public transport, water treatment facilities, eco-friendly farming and sustainable forestry.

Observers pointed out that the ESG agenda will become more important to investors as time goes on. Countries that already are hot on sustainability issues are Australia, the Netherlands, the UK and Canada, which coincidentally are among the countries with the most capital liquidity. This is providing an incentive to general partners to demonstrate adoption to a high level of various global standards.