The West Midlands Pension Fund has expanded its global portfolio fairly aggressively in recent years and learned some invaluable lessons along the way. Investment manager Mike Hardwick speaks to Richard Lowe about transparency and keeping faith with the commingled fund model

The £7.7bn (€9.27bn) West Midlands Pension Fund (WMPF) has learned some invaluable lessons during the past three years. It began building up an indirect global real estate exposure in 2007, in order to complement its sizeable directly held UK portfolio. Today it is committed to a series of funds, ranging from pan-European vehicles to Brazilian opportunity funds, with varying degrees of risk and return. "Overall it has been a positive experience, although it has been an interesting learning curve," says Mike Hardwick, WMPF's investment manager with responsibility for property. "There are some clear winners. Those managers that kept investors informed of problems, didn't hide anything and clearly aligned investors' interests with their own came out a lot stronger than those that weren't so transparent, being more inclined to protect their own interests."

Hardwick says those who didn't demonstrate best practice "will pay a price, while the others will benefit. A reputation for good business practice is particularly important because investor circles are pretty small and things don't go unnoticed."

As part of the fund's overall investment strategy it made the decision several years ago to expand beyond the UK and a long-standing pan-European real estate investment, so as not to have "all its eggs in one basket". WMPF believes a global allocation within asset classes generally offers a dual benefit of increased diversification and the potential for higher returns. He admits you can argue that global real estate markets have been shown to be more correlated than perhaps previously assumed, but he says there are always "pockets" that behave differently. He cites Brazil as an example.

And taking a global approach rather than a European one was deemed important. "Although we can see some diversification within European markets, the ability to diversify globally gives you a better chance of achieving less correlation and the investment opportunities are enhanced," he says. "We also recognise that the emerging markets, in particular the BRICs, are becoming more and more crucial to the global economy and therefore warrant some exposure."

WMPF selects its own funds in-house and without the help of consultants. The fund has much experience of selecting private equity vehicles and found the skills were transferrable for real estate investing. "It is slightly different, but a lot of the main themes of investing in private equity are relevant," he says. The LP structure and a lot of the standard issues around alignment are completely transferrable. In addition, not using mainstream consultants enables the fund to access lesser-known but very able managers, often in niche areas."

WMPF has recently invested in a pan-Asian vehicle. In 2009, the fund made its first investment in a fund of funds strategy: a global real estate secondaries fund, which will invest in existing funds via the secondary market. "We believed there was some mispricing out there and opportunity in the secondary market."

The pension fund was particularly attracted to the specialist niche strategy as WMPF rarely invests in funds of funds. Any future investments in funds of funds would be with managers who could add value in terms of access and knowledge. In other words, a strategy would need to be complementary to its current indirect approach, not a substitute. "We are aware of the extra layer of fees and we want to be sure that the investment warrants it," Hardwick adds.

The pension fund still believes in the commingled fund model at a time when some large investors are looking to club deals and joint ventures as the best alternative. "We recognise its imperfections. It's not a perfect model, but I think people who see the club deal as the only answer to all their problems are perhaps being a little bit naive. There are plenty of relationships that turn sour where the investors are perfectly aligned at the start," Hardwick says.

He cites US endowments as an example of a group of institutions that many investors would have been keen to invest alongside as a limited partner. "That situation quickly changed", he says. "It's not a panacea, it's not the answer to every problem, and it has its own set of risks and problems. So we are quite comfortable making investments in limited partnerships."

WMPF is looking to slow down the pace of its real estate investment activity following a period of fairly aggressive expansion. It is undergoing an actuarial review, which it is hoped will be concluded in the early part of the fourth quarter of 2010, after which the pension fund can take stock of its allocation to property. "It's a temporary pause," Hardwick says. "We are comfortable in positions we have taken so far, but we do need to refer to the fund's total benchmark before we formulate strategy going forward."

The fund has also been active in its domestic market where it invests directly in core properties through its investment manager, ING Real Estate. Last year it acquired two commercial assets, an Asda supermarket in Birmingham for £36.5m and a self-contained industrial estate in London's Park Royal district for £41.1m, with both acquisitions showing good gains in capital value.

WMPF is still positive about the long-term health of the UK market, and has four properties totalling £170m under offer. However, it is unlikely to follow these with further deals soon, as the 9% allocation to real estate will be fully committed. But as Hardwick says, "as a flavour of our conviction, it says a lot".