Agenda item
Monitoring report on fund activity for the quarter ended 30 September 2014
The report provides a summary of the Fund’s activity during the quarter ended 30 September 2014. It examines the actions taken, the economic and market background, and investment performance, as well as commenting on events in the quarter.
Minutes:
Julian Pendock introduced the report and advised that although relative performance for the quarter represented an improvement, overall the Fund continued to be one of the lower performing funds in the Local Government Pension Schemes (LGPS) universe. However, this could not be rectified in a short period of time and a thorough analysis of performance in a number of areas needed be undertaken before considering what changes could be made to improve returns on investments.
Peter Davies (Independent Adviser to the Fund) then addressed the sub-committee to report on economies, markets and currencies. He advised that since the report had been produced, equity markets had risen above the level they were at in September 2014, whilst bond yields had normalised. Meanwhile, sterling had continued to weaken compared to other currencies, whilst Brent crude oil, which fell 16% during the quarter, had fallen by a further 9% in the first three weeks of October 2014, which was a positive development for some. Members noted the FTSE capital returns for various markets as set out in the report. Members heard that Japan had increased spending on Government bonds, however it remained in recession and its policy of reflating the stock market did not appear to be working. It was noted that the Fund had few investments in Japan and so would not be affected. Peter Davies added that he expected equity markets to fall back again following their recent rise.
Tom Wright (Baillie Gifford) was then invited to give a presentation on the Fund. Tom Wright informed members that Baillie Gifford had been appointed by the council on 20 June 2012 to manage the diversified growth fund on the council’s behalf and had set a target to provide a return that outperformed the UK base rate by at least 3.5% per annum over rolling five year periods. A target of annualised volatility of less than 10% over rolling five year periods had also been set. Members noted the asset allocation and performance of the Fund and valuation from December 2008 to July 2014 and were advised that the net return of the Fund since 20 June 2012 was 6.9%. Tom Wright advised that there was some encouraging news in respect of improvements in economic data in parts of the developed world, such as the United States of America and good news from companies also gave grounds for optimism. However, risks remained and the end of quantitative easing and an increase in interest rates may hit some assets. Tom Wright added that many asset classes had benefitted from an accommodative monetary policy and now appeared expensive and so caution should be applied.
During discussion, a member enquired what the implications of the price of crude Brent oil going down would be. A member noted the slight increase in bonds returns and commented that the returns were likely to remain similar for the next three months. In view of this, he stated that there appeared to be a cautious approach in investing and that the Fund was not likely to make much inroads compared to the performance of other funds. He added that in view of the overall global economic situation, it was perhaps prudent to continue with a cautious approach. He also asked whether there should be more investment in emerging markets such as Mexico, which had been economically reformed and was more stable. A member commented that there was a comparatively large amount of investment in alternatives that had not performed well and he queried whether funds could be divested from these. It was also asked whether the Fund was actively investing in China and India.
In reply to the issues raised, Peter Davies advised that oil producers had not scaled back on supply and this had been a surprise to the market as it had been anticipated the supply would be reduced and so prices would continue to remain lower for now.
Julian Pendock advised that the Henderson Total Return Bond Fund took a safety first approach, however the various funding strategies including tracking had not worked out in the way that had been anticipated. Members heard that there was very active corporate governance in terms of the larger funds within the Pension Fund, however there would need to be consideration given to dropping the lower performing funds. In respect of alternative investments, Julian Pendock advised that some investments were unlikely to meet their targets and members noted that Julian Pendock, Conrad Hall (Chief Finance Officer, Finance and IT) and Peter Davies had met with fund managers to hold them to account. However, the sub-committee heard that the funds were legally “locked up” and so could not be redeemed, but the council would continue to fight for fee reductions. Julian Pendock advised that a cautious approach was being taken in the sense that there had been a distribution of risk and the Fund was also being considered holistically. He added that the emerging markets mandate urgently needed to be reviewed in the light of both the structure and performance of the existing emerging markets fund manager.
Tom Wright advised that in terms of investments in companies, most were western listed however some were based in China and India, such as Prudential and there was a notable proportion of the population in these countries who had sufficient income to set aside money for matters such as insurance and pensions and other financial arrangements.
RESOLVED:
that the monitoring report on Fund activity for the quarter ended 30 September 2014 be noted.
Supporting documents: