EDINBURGH (Reuters) - British pension funds, now big bond investors, should focus more on what companies do with the money they have borrowed, according to the head of investments at Europe’s largest charitable foundation.
Danny Truell, the chief investment officer of the Wellcome Trust, told a pensions conference in Edinburgh that Britain’s corporate bond market was also too dependent on financial borrowers.
“There needs to be more thinking about corporate governance in corporate debt,” said Truell, who manages investments at Wellcome, which has assets of more than 15 billion pounds.
He said he had issued a corporate bond in July 2006. “In the last 18 months I have had one 3-minute telephone call from a bondholder asking how we’re getting on. That does not strike me as powerful governance.”
Truell said: “As pension funds that is something you need to think about as you build up your corporate debt. What is your governance over what companies are actually doing with the money you have effectively lent them?”
Pension funds had invested a total of 80 billion pounds in UK corporate debt in 2007 — a 40-fold increase from 2000, said Truell, largely to reduce their weighting to risky equities.
“You moved from equities to bonds, but what most of you did was move from UK equities to UK bonds. The fact is that of UK equities, 25 percent of the market is financials. Of the UK bond market, 60 percent is financials,” said Truell.
“So what you were effectively doing was taking money from holding equity in a bank to lending that money to a bank. What you were enabling... was banks to build up leverage and using it to build up the balance sheet.”
A lot of that money last year was lent to private equity buyout firms, said Truell — a sector that many pension funds have shied away from investing in directly because they regard it as too risky.
“We need to tighten governance and transparency, and, secondly, people need to think globally about how to get away from that high concentration on UK financials.”