My fund is unique in terms of its liability structure, cash flows and appetite for risk. Why should I be interested in what other funds are doing? This is an interesting and increasingly common question that merits further investigation. The returns local authority funds are producing continue to be extremely homogenous. Indeed over the last 10 years, more than half of all local authority funds yielded returns within 0.5% of the median. Such a narrow deviance among returns is not unexpected. Local authority funds are very similar: all remain open to new members; most are in some level of ongoing actuarial deficit; they continue to have positive cashflow; and they generally have similar maturity levels. Their differences in asset allocation and structure could be considered to reflect different responses to what are, broadly speaking, the same issues. The WM Local Authority Universe brings together 90% of the market to create the most comprehensive industry analysis available. The role of this universe has changed over time. As recently as five years ago, it was used as a primary benchmark for the majority of local authority funds, whereas today it is increasingly used to provide a context into which to place fund profiles and performance. Recently, local authority funds have made a very marked change in the type of benchmarks they use. By the end of March 2007, less than 10% of these funds still used a peer group as their primary benchmark. Interestingly, even though the other 90% now have customised benchmarks, asset allocation - with a handful of exceptions - remains very tightly grouped, as illustrated in Figure 1. Half of all local authority funds have between 66% and 74% of their assets in equities. Among bonds the story is similar, although at the extremes there is a clear upward skew. This highlights how similar these funds remain, both in terms of the issues they face and their responses to them. The WM Local Authority Universe allows funds to focus on trends. This doesn't mean obediently 'following the herd', which is a criticism often associated with any analysis from a peer group. Instead, it allows funds to identify differences and their impact, and to understand why these differences arise. For instance, the Universe reflects the increased globalisation of equity investment over the last decade. Ten years ago, most local authority funds had the vast majority of their equity asset invested in the UK, whereas now the split is almost 50:50. A fund operating without the context of the Universe might not realise that by changing nothing, it has become quite different. The Universe also provides a reality check for funds that feel pressured by the latest trends and media invocation that 'everybody' is doing something, as was recently the case with so-called 'alternative' assets. As the media buzz may suggest, the average exposure to these assets is indeed increasing. However, it is growing from a very low base and exposure remains at a very low level: currently 2.3% of the average fund, of which around half is private equity or venture capital. Approximately 40% of funds have no commitment to alternatives at all. Looking at the Universe can also provide funds with information to help with rational decision-making. For example, a review of the Universe over the last 10 years shows that, even before investment management fees were paid, only 18% of funds managed to outperform the market index in North America. Conversely, in the Pacific almost 80% of funds outperformed the index over the same period. Such statistics can help funds make rational decisions about where to invest actively versus passively. Karen Thrumble is head of local authority services at WM Performance measures.
