Agenda item
Presentation by Henderson - Total Return Bond Fund
Members will receive a presentation by Henderson representatives on the Total Return Bond Fund.
Minutes:
Mark Fulwood (Henderson Global Investors) began the presentation by advising that the economic data for 2013 had shown encouraging improvement overall, particularly for countries such as the USA and the UK, although some areas such as the EU continued to struggle. Members noted that Government bonds (Gilts) and emerging markets had been the lowest performers, whilst high yield investments and secured loans had been the highest. The market had seen investors encouraged to take more risks for higher yields. The committee heard that in 2012, UK Gilt yields had hit their lowest ever since records had begun and this was due to low interest rate and borrowing costs and the Government undertaking quantitative easing. Meanwhile, a fall in global interest rates since 2008 had led to a strong performance from high quality investment grade UK corporate bond yields.
Kevin Adams (Henderson Global Investors) then described the Total Return Bond Fund that they operate on behalf of the Brent Pension Fund that aims to achieve an average return of 6% per annum over a three to five year rolling period. He explained that the previous portfolio had focused on UK Gilts and corporate bonds. Under the Total Return Bond Fund portfolio introduced in April 2012, there is a broader range of investments that offer good returns whilst providing the ability to protect capital. Members noted the present asset allocation of the Brent Pension Fund’s investment portfolio and that the duration of 0.9 years helped protect the council’s investments from rising interest rates. The committee also acknowledged the good sterling share class performance of the Total Return Bond Fund in comparison with other fixed income asset classes.
Mark Fulwood then updated members of the performance review of the portfolio, which although it had not met the average annual target return of 6.0%, gross of fees, for 2013, he felt would be achievable over the medium term. Members also acknowledged that the current portfolio had significantly outperformed the previous benchmark and an added value of an estimated £5m. Kevin Adams then concluded the presentation by providing members with an overview of the market outlook, suggesting that global growth would continue to improve, particularly in the USA and the UK. UK Gilt yield prices were also expected to normalise, whilst corporate bonds would continue to perform strongly all the while low interest rates remained.
During members’ discussion, a member noted that asset backed securities accounted for around only 12% of the portfolio and he queried the reasons for this. In respect of the More London investment, he enquired what steps would be taken to protect funds if the tenants moved out or were unable to keep up with payments. As interest rates were likely to rise in future, he asked if any modelling had been done as to the likely impact on corporate bonds and what was the proportion of bonds in sterling and how were currency risks managed. Another member sought the details of the relative size of investment holdings with governments in the emerging markets of Russia, Mexico and Singapore.
Mick Bowden (Operational Director – Finance, Finance and IT) noted that there had been significant movement in asset allocation over the last two years and he sought further details of these. Anthony Dodridge (Head of Exchequer and Investment, Finance and IT) sought clarification of the total value of the Total Return Bond Fund and whether there was there a risk that the Fund was overly diversified.
In reply to the issues raised, Kevin Adams advised that although there was some attraction to asset backed securities, at present they did not match that of corporate bonds. In respect of More London, he advised that there was a category of investors below the Brent Pension Fund that would be affected by loss of tenants or tenants’ income before any potential loss to the Brent Pension Fund, however as the Fund had a share in ownership of the building, it had the ability to seize its assets if necessary. Kevin Adams explained that stress testing of companies and of the total portfolio value of corporate bonds in relation to potential interest rate rises had been undertaken. Members noted that approximately a third of bonds were in sterling, and the remaining two thirds were hedged back into sterling. In respect of changes to asset allocation, Kevin Adams advised that the proportion of high yield investment had risen from 10% to 24% and that the new portfolio afforded more flexibility. The total value of the portfolio was presently just over £500m, with the average holding around £1m, although some were considerably more. Kevin Adams advised that it was desirable to be well diversified in the current market and a range of between 200 to 400 holdings was in his view prudent. The committee heard that the relative size of investment holdings in governments in the emerging markets of Mexico and Singapore were 4%, 2% and 0.5% respectively.
On behalf of the committee, the Chair thanked Kevin Adams and Mark Fulwood for their presentation and their answers to members’ and officers’ queries.