Agenda item
Quarterly monitoring report on fund activity
This report provides a summary of the Fund’s activity during the quarter ended 31 December 2013. It examines the actions taken, the economic and market background, and investment performance, as well as commenting on events in the quarter.
Minutes:
Anthony Dodridge introduced the report and confirmed that the total value of the Fund had increased by £14.1m in value to £562.5m in the quarter ending 31 December 2013. The Fund’s return for the quarter was 2.9% which was only a small margin away from the benchmark of 3.2%. The largest contributors to the positive return were publicly quoted UK and overseas developed market equities and encouragingly, after a number of years of underperformance, UK property. It was noted that private equity, infrastructure, European property and emerging market equities had a negative impact. Anthony Dodridge advised that as of 31 December 2013, the 12 month return was 11.6% as compared to the benchmark of 13% and for 3 years an annualised 5.6% compared to the long term investment return target of 6.5% per annum. Members noted that although at the time of the publication of the report, the Fund had reported an estimated drop in value of £8.5m for January 2014, the most recent indicators suggested that a strong performance in February 2014 had since reversed this loss.
Anthony Dodridge explained that the UK’s strong sterling performance against other currencies, in particular the US dollar and the Euro, had dampened investment performance in the Fund’s investment holdings in overseas currencies, such as private equity, infrastructure, emerging market equities and European property. Whilst the Fund had been one of the lower performing Local Government Pension Schemes (LGPS) for a number of years, Anthony Dodridge advised that almost 20% of the Fund’s assets were held in unquoted private equity and infrastructure investments that would continue to remain immature for now, although these should bear fruit in the long term. Furthermore, in some investment areas, the Brent Pension Fund compared well to other LGPS, such as fixed income where it had performed as the tenth highest percentile nationally. Members noted the asset allocation as of 31 December 2013 compared to the benchmark and investment returns in individual markets. Anthony Dodridge also welcomed the fact that outstanding contractual commitments on private equity and infrastructure had been almost halved since 31 March 2012.
Peter Davies (Independent Adviser to the Fund) then advised members that the last quarter of 2013 and for the whole year had been good for equities in Northern European countries and the USA, but much weaker in the emerging markets. UK inflation had continued to fall and the Consumer Price Index had fallen for the year to January 2014 to 1.9%, below the 2% target rate. There were encouraging forecasts for UK growth in 2014, with the growth rate significantly higher than previous forecasts. Turning to equities, Peter Davies advised that although there had been some optimism at the end of 2013, this had been disrupted by the fall of the Argentinian peso which had triggered weaknesses in several other currencies, including Brazil, Chile, South Africa and Turkey and investors remained cautious in respect of emerging markets. Members noted the year to date moves in equity markets for the UK, which had increased by 1.1%, and for Europe, the USA, Pacific Basin, Japan and the emerging markets.
During members’ discussion, clarification was sought as to the grounds for optimism for the Fund in the longer term and whether an 8% return on private equity and infrastructure was achievable. Members asked what were the main currencies used for investments and was it anticipated that the UK Government would undertake any further quantitative easing. Views were also sought in respect of the Bank of England’s forecast growth of 3.4% for the UK in 2014. With regard to the UK’s GBP growth rate announced as 1.9% for 2013, a member enquired whether this had now been officially confirmed. The committee also sought further reasons as to why the Fund’s performance had been lower in comparison with other LGPS.
In reply to the issues raised, Anthony Dodridge advised that the Fund was beginning to see significant distributions from its private equity and infrastructure investments, and these latest evaluations which had not been available at the time of drafting the quarterly monitoring report were beginning to evidence a marked improvement in returns in this area. Private equity and infrastructure had clearly contributed to dragging down the historic performance of the Fund. The 8% benchmark for returns in respect of these two asset classes was the long term objective. With regard to currencies used for investments, Anthony Dodridge confirmed that these were mainly US dollar denominated for private equity and infrastructure. He explained that the private equity and infrastructure holdings were unhedged since currency hedging came at a cost and its impact on investment returns was expected to be negligible over the longer term in respect of the US dollar and Euro denominated investments. Members noted that there was an element of expectation in the market that the US dollar would make a recovery in due course. With regard to the Fund’s performance compared to other LGPS funds, Anthony Dodridge advised that the Fund had performed relatively well in publicly quoted equities over the last twelve months. He added that the Fund’s more diverse investments compared to some other LPGS positioned it more robustly in the longer term for consistent returns.
Peter Davies added that he felt an 8% return in private equity was a realistic target in the longer term. He did not think that the UK Government would undertake any quantitative easing in the foreseeable future due the strength of the UK’s economic recovery and it was more likely that it would be considering raising interest rates. In respect of the Bank of England’s forecast growth in GDP for 2014, Peter Davies informed members that this was at the high end of forecasts that had been made. He also advised that around 20% of the Fund’s investments were unquoted and so it was more difficult to make direct comparisons with other LGPS.
RESOLVED:-
that the quarterly monitoring report on fund activity be noted.
Supporting documents: