Roger Gray has become the first new chief investment officer of the £27 billion Universities Superannuation Scheme (USS) in 17 years, and will reconsider the fund’s use of regional equity mandates. In the British pension environment, USS is in a privileged position as one of the few defined benefit schemes that is still open, contributions positive and relatively immature. From an investment point of view, and for the fund’s new CIO, Roger Gray, this allows its investment allocations to be more aggressive relative to its more liability-driven peers, and the opportunity for more exciting investments to be explored, including alternatives. The fund has a broad strategy to move to 20 per cent alternatives, and Gray started the job in September with plans to work “with USS’ investment team and with the trustees to generate the required long-term returns from a broad and judicious mix of asset classes and strategies”.

Only about six weeks into the job, Gray is new enough so that some of his ideas haven’t been taken to the investment committee yet. However he has already identified areas of focus for both investment opportunities and expanding the inhouse team. The London investment office of USS employs 68 people including some settlement staff and administration, and Gray credits his predecessor Peter Moon with creating a collegial and friendly environment with little politics. The fund manages most of its investments inhouse, except for roughly 10 per cent in alternatives and about 10 per cent in external equities. Gray says the largest pools of talent are the public equity desks, property, and alternatives, with a small fixed income team and some cash management.

“Peter deserves a lot of credit for many things, I have come to a place that has some good professionals in situ,” he said. He believes the area most lacking internally is a strategy role, which would cover medium-term asset allocation and manage the rebalancing process. “The area I think we have a gap and is important to fill is this strategy area,” he said. “There is no strategy unit for that, no ongoing continuous activity.” In addition Gray will expand on an initiative underway to build risk and quantitative tools at the fund, and move more attention to performance analytics and improve the oversight function in that area. Gray started with USS in September, having previously been chief investment officer at Hermes Investment Management, and before that working in a private sector career including UBS Brinson and Rothschild Asset Management.

One of the more philosophical issues front of mind for Gray is the regional rather than global equities allocation. The UK traditionally has invested on a regional basis, unlike other parts of the world which allocate globally, and the equity investments at the USS London investment office are divided into five regions, with teams specialising in the UK, American, European, Japanese and Asian ex-Japan markets. Gray said there could be some room to debate this regional versus global allocation. “I’m a globalist by heart but a regionalist or pragmatist by head. It seems difficult to pull together a true global fund,” he said.

“Global equities on a quant basis is plausible. You have to think hard about how to pull it together but it is ripe for experimentation.” While the UK traditionally has had a regional focus, it was a nuance of Moon’s not to make a distinction between developed and emerging market equities. So the internal team has to make a call, for example, within the Americas, to allocate between the US and Brazil. Therefore, Gray said global emerging markets was an asset class the fund may also consider introducing. “We haven’t got an emerging markets focus per se. Mandates are set up as all-country, regional mandates, so it’s an area to look at.”

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