Agenda item

This report provides a summary of the Fund’s activity during the quarter ended 30 September 2017. It examines the economic and market background, and investment performance, as well as commenting on events in the quarter

The Sub-Committee considered a report from the Chief Finance Officer that provided a summary of the Fund’s activity during the quarter ended 30 September 2017. The report also examines the economic and market background, and investment performance, as well as commenting on events in the quarter. Ms Folake Olufeko, Senior Finance Analyst introduced the report. 

Members heard that in the third quarter (Q3) of the calendar year, the Fund increased by 1.9% (£15.1m) from £812.0m to £827.1m compared to an increase in the second quarter (Q2) of 1.2% (£9.3m). Overall, the value of the fund had increased by 6.7% in the first nine months of the year, of which 1.5% related to actual asset appreciation and the remainder, to contributions from capital calls. Although the Fund had seen a consecutive quarterly increase in the value of assets, its performance for the quarter was below benchmark level of 2%.

Ms Olufeko referenced the tables within the report that set out the performance of respective asset class and contractual commitments.  Of note was the equities allocation, which had performed well in the last few quarters and therefore the total allocation has exceeded the target. Investments in Infrastructure saw a consecutive depreciation in value with a £3.1m drop in Q2 and £1.7m drop in Q3.  Officers would continue to monitor the performance to inform future investment decisions. Ms Folake explained that the cash deposits balance of £70.2m was principally required to fund transfer values in relation to the College of North West London, to honour calls on capital commitments in Private Equity and Infrastructure and to re-allocate to other future investments but in the interim was being invested in Money Market Funds and short term loans to other Local Authorities for interest returns.

Ms Olufeko continued that the Fund also realised a complete sale of the UK property investments in quarter 4 of 2016/17 and subject to market conditions, the European property investments were also planned to be run down in 2018.  The Fund is monitoring developments and the opening of investment opportunities on the CIV platform with a view to transitioning assets across as soon as there were suitable sub-funds that are in line with the Fund’s investment and asset allocation strategy.  She then drew members’ attention to table 3 in the report which set out the investment returns in individual market and added that officers would continue to monitor areas where performance was below benchmark. 

In the ensuing discussion, members expressed concerns about the performance of Ruffer and sought officers’ views on how this could be addressed and the time frame within which the situation could be addressed.  Ravinder Jassar (Head of Finance) clarified that the negative performance of Ruffer was a concern but that actions had been taken to address the issues, including investing in short term equities against long term bonds which has had a positive effect.

Peter Davies (Independent Adviser) gave summary of his quarterly report.  Members were informed that the forecast growth rate for the UK economy in 2017 had been revised downwards to 1.5% after sluggish growth in the second quarter and the estimated figure for 2018 even lower at +1.3%. Meanwhile, forecast growth rates in the other developed regions have been maintained or revised upwards.  Mr Davies continued that for the second successive quarter, equity markets were little changed with the UK market continuing to deliver a return significantly below that of overseas equity markets, while Continental Europe had been by far the strongest region during the past year. The mid- and small-cap sectors of the UK market had out-performed the FTSE 100 over the past quarter and 12 months and in the case with bonds, there was very little net change in the yields on medium-term government bonds in the major markets.

In terms of outlook, Mr Davies informed members that although equity markets had edged gradually upwards despite geo-political concerns surrounding developments in North Korea and the Middle East, the impending interest rate rises in the US and UK, together with the tapering of quantitative easing by the US Fed – and possibly by the European Central Bank – were likely to act as a brake on equity markets as the cost of borrowing rises.   Similarly, government bond market yields were likely to rise in response to higher short-term rates, unless they become ‘safe havens’ in the event of political crisis, or if global economic growth begins to slow down. In either of these situations, equities can be expected to weaken significantly.

RESOLVED:

That the performance report and the independent financial adviser’s investment reports attached to the main body of this report be noted.