Agenda item

This report presents the analysis and results of the investment review carried out by Hymans Robertson. The review follows on from the 2020 strategic investment review and the Fund’s 2022 Actuarial Valuation.

Sawan Shah (Head of Pensions, Brent Council) introduced the report, which detailed the review undertaken by the Fund’s investment advisor, Hymans Robertson, of the current investment strategy, following on from the Fund’s 2022 valuation. The purpose of the review was to evaluate the current investment strategy and analyse the ability of alternative strategies to meet the Fund’s strategic objectives. The Committee noted that the previous investment strategy review was agreed in February 2020, with it being regarded as best practice to regularly review the investment strategy to ensure that the strategy was still fit for purpose and was meeting objectives.

On a high level, the Committee heard that the fund was broadly in line with the interim target allocation. Nevertheless, it was important for the Fund to continually develop their strategy moving towards goals such as investing further in property. Regarding returns on investment, Sawan Shah highlighted that the mix of assets owned by the Fund, rather than the underlying fund manager, was the main factor in the Fund’s performance.

Following the introduction, Sawan Shah handed over to Kenneth Taylor (Senior Investment Analyst, Hymans Robertson LLP) to present the report in further detail. The following key points were highlighted:

·       Overall, the funding position had improved since the 2019 actuarial valuation. This confirmed that the 2019 investment strategy was still appropriate.

·       Hymans Robertson continued to support the Fund’s long-term target allocations to Growth, Income and Protection assets, which were agreed following the 2019 actuarial valuation. It was recommended that the Fund continued to build out its private market investments in infrastructure, private debt and property to help move the Fund towards the long-term target allocations previously agreed both from a position of diversification and accessing alternative sources of excess return.

·       Regarding cashflow, the 10% pension increase in April 2023, coupled with a reduction in future contributions, was expected to impact the cashflow position of the Fund. Whilst cashflow had not been analysed in the investment strategy review, Hymans Robertson stated that they would be happy to prepare this for the Committee. The cashflow analysis would assess whether current levels of investment income were sufficient to cover any shortfall between contribution income and benefits paid, better informing future investment decisions.

·       The Committee noted that growth investments represented the highest potential returns but also the highest risk. With regard to growth portfolio recommendations, Hymans Robertson stated that the Fund was currently circa 9% overweight in equities relative to the long-term target allocation (actual circa 59% vs target 50%). Around one-third of this overweight position would naturally be corrected as the private equity mandate reduced over the next few years. It was recommended that the remaining circa 6% should be sold (from the LGIM global equity mandate) and re-invested into multi-asset credit and gilts to increase these towards their target allocations.

·       As the Fund continued to develop its net zero roadmap, a priority action was to review the Fund’s global equities to determine whether the Fund could continue to access global equity markets whilst simultaneously achieving a reduction in its carbon emissions. At circa 40% of total assets, global equities were the largest contributor to the Fund’s carbon emissions. Hymans Robertson recommended that the Committee undertook a market review during Q2 2023 and selected one or possibly two low carbon global equity funds to replace the current LGIM global equity mandate.

·       The current target allocation of property was 10%, however, only 2.5% of the Fund was invested across two UK commercial property mandates. This differed from most London Boroughs, who were closer to their target allocations. Nevertheless, this provided the opportunity to create a diversified portfolio comprising of UK commercial property, UK housing, and global property. A 10% allocation was broadly equivalent to £110m, which was recommended to be allocated in the following way:

Ø  UK commercial (UBS and Fidelity) - £40m (36%)

Ø   LCIV UK Housing Fund - £30m (28%)

Ø   Global property - £40m (36%)

·       It was explained that the property market was currently undergoing repricing with valuations falling. This had implications regarding the timing of investing in property. It was recommended to wait until the second half of 2023 before adding to the Fund’s UK commercial property allocation and investing in a new global property fund. In addition, the Committee were advised to carry out a review of global property managers ahead of making any investment in Q3 or Q4 of 2023.

·       New investments needed to be identified to build the Fund’s allocation to infrastructure towards its 15% target. The Committee were recommended to carry out a review of suitable infrastructure funds, including the London CIV renewables infrastructure fund, in addition to funds offered by external managers. Timberland was also highlighted as a fund that was attracting interest within the LGPS. An allocation to Timberland could be considered as part of a diversified infrastructure portfolio.

·       In explaining private debt asset class, the Committee noted that this comprised of privately negotiated loans, in which the Fund would provide capital to companies for a return with added interest. The Fund had committed £50m to the London CIV private debt fund and this investment was currently in its build up phase. The expected profile of the private debt fund was such that it increased in value as capital was invested, and then reduced in value as income and redemptions were returned to the Fund. To maintain the 5% target allocation, it was common for pension schemes to invest in a series of private debt funds, with commitments being made to new funds every 2-3 years. The Committee were recommended to investigate options in this area and, in the first instance, ask London CIV to confirm its future plans.

·       Regarding the Fund’s protection portfolio, bond yields increased significantly during 2022. While this had led to a fall in bond asset values, the higher yield meant investing in bonds was more attractive now than it had been for some time. Currently the Fund’s protection portfolio consisted of multi-asset credit and fixed interest gilts. Replacing the fixed-interest gilts with corporate bonds would boost expected returns with only a marginal increase in risk levels.

·       In speaking on the priority of recommendations, rebalancing the overweight holding in equities and finalising the decision on the LCIV UK Housing Fund were deemed to be high. It was considered that other recommendations could await implementation, as correctly sequencing actions was imperative.

The Chair then welcomed questions from the Committee, with questions and responses summarised below:

·       Regarding any alternative asset classes that the Fund could invest in or had previously counted out, the Committee noted that long term speculative investment in private equity was not included in the long term strategy. Hymans Robertson were happy with the current investment to come to an end, although this could change if the Committee wished. A discussion concerning the necessity of having a minimum allocation to UK equities was also raised. It was explained that the UK market had not performed as well as the global market in the long term. In concluding the response, James Glasgow (Senior Investment Analyst, Hymans Robertson LLP) explained that consistent returns through simplistic investments was preferable. Overdiversifying the portfolio could introduce unnecessary risk.

·       The Committee questioned whether the Fund should invest in private rented properties. In response, the Committee heard that these investments could expose the Fund to risks such as short term tenancies and demand risks. Investing in private rented properties would take advantage of short term opportunities. However, the Fund was largely a long-term investor and the London CIV UK Housing Fund could offer the property diversification that the Fund required.

·       The underlying assumptions of the investment strategy were queried, in which Kenneth Taylor detailed that asset liability modelling analysed a large range of economic scenarios to see how the funding position of the Fund may change. The modelling was based on views on the future of the economy and past asset returns, creating a robust model for assumptions. It was also explained that the state of the economy was not always the main factor to account for depending on asset class. For example, when moving from an equity fund to a low carbon equity fund, the economy was largely unimportant. However, surveying the market was much more necessary when investing in property. Sawan Shah added that, as a long term investor, market timing was not the prime factor underlying investment decisions. Furthermore, investments tended to be staggered to mitigate against volatility.

·       Regarding the rebalancing of the Fund’s portfolio, the Committee heard that if they were to choose not to rebalance, the Fund would be exposed to greater risk. Choosing not to move 6% of equities into bonds would leave the Fund vulnerable to market downturns. The recommendation of a phased rebalance aimed to minimise the Fund’s exposure to risk.

·       The Committee questioned how the recommendations in the investment strategy review impacted the Fund’s net zero strategy. Kenneth Taylor explained that the recommendation to review, and eventually move, to a low carbon equity fund could reduce the Fund’s carbon emissions by 50% whilst maintaining returns and this move was currently the priority. However, the Committee noted that moving other assets to low carbon alternatives could take decades. In the meantime, actions such as challenging London CIV on management selection could reduce the Fund’s carbon output.

Members welcomed the update provided and with no further issues raised thanked Hymans Robertson LLP for their presentation. The Committee RESOLVED to:

(1)           Agree the investment strategy review undertaken by the Fund’s investment advisors, Hymans Robertson, detailed in Appendix 1 of the report.

(2)           Note that the investment strategy review supported the Fund’s net zero road map, with a market review of the global equities allocation planned for 2023.