Agenda item

To receive the Brent Pension Fund Q1 2023 Investment Monitoring Report.

James Glasgow (Senior Investment Analyst, Hymans Robertson LLP) presented the report, which outlined the performance of the Brent Pension Fund over the first quarter of 2023.

Regarding the overall performance of the Fund, the Committee heard that the Fund had posted positive returns over the quarter, ending the period with a valuation of £1,116.4m, up from £1,072.1m at the end of Q4 2022. Comparing the Fund’s performance against the benchmark, the Fund had underperformed by 0.6%, returning 2.7% vs the target of 3.3%. Nevertheless, when focussing on performance over the last three years, the Fund had overperformed the benchmark by 1.4% which was said to be encouraging. The Fund’s strongest asset was global equities, which returned 3.1% over the quarter, and a fall in yields over the quarter saw positive returns from the UK government bond market.

In discussing the Fund’s asset allocations, the Committee noted that, following the agreement of the investment strategy review at the 20 February 2023 meeting, allocation rebalancing was underway to move closer to the long-term allocation target of 50% Growth, 35% Income/Diversifiers, and 15% Protection. Currently, the Fund was broadly in line with the interim target allocations for growth assets, overweight to income assets and underweight to protection assets.

Concerning manager performance, the majority of assets performed well, with the standout performer being the LGIM Global Equity fund, returning 4.9% over the quarter and matching the benchmark. Global equities fared better than UK equities due to the UK’s higher weighting to cyclical sectors such as financials, industrials, energy and basic materials, which underperformed over the period. Capital Dynamics’ private equity mandate was the most significant underperformer over the quarter, returning -4.8% against a benchmark of 5.2%. However, the Committee were informed that private equity valuations tended to lag those of listed markets. Similarly, although mostly concerned with their longer-term performance, infrastructure funds had underperformed relative to their benchmarks, but once again these valuations also tended to lag the market. Despite the economic volatility of the last 12 months, due to the diversification of the Fund’s assets the total return for the Fund was only down 2.6%.

In focussing on each mandate’s contribution to the Fund’s absolute performance over the quarter according to their allocation, the largest contributor to performance over the period was LGIM’s Global Equity fund, given its positive performance and its sizeable allocation of circa 44%. In spite of the large negative returns posted by the Capital Dynamics Infrastructure and Fidelity UK Real Estate funds, these mandates had allocations of circa 2% and circa 1% respectively of the total Fund, hence did not detract materially from the Fund’s overall performance. Furthermore, the LCIV Ruffer Multi-Asset fund’s underperformance was offset by the LCIV Ballie Gifford Multi-Asset fund, due to their contrasting investment approaches.

Regarding the individual fund manager ratings, the Committee were advised that there were no concerns with the majority of managers. Nevertheless, the LCIV Baillie Gifford Multi Asset fund was downgraded from ‘preferred’ to ‘positive’. It was noted that the key reasons for the decision revolved around assessments relating to macro resources, risk management, and concerns of style drift. However, James Glasgow expressed confidence in their ability to meet long-term performance objectives and reassured the Committee that members would be kept updated. Furthermore, despite their underperformance, the manager ratings for the Capital Dynamics Infrastructure and LCIV Infrastructure funds remained ‘green’.

In turning their attention to the performance of individual fund managers, the Committee noted the following:

• The LGIM Global Equity mandate returned 4.9% over the quarter. Performance in global equity markets also remained strong over a longer period, returning 16.9% over the last 3 years. It was explained that lower energy prices, the reopening of China and improved business sentiment outweighed concerns of sustained elevated core inflation and interest rates.

• The LGIM UK Equity mandate returned 3.1% over the quarter. Performance over 12 months and 3 years was also strong, albeit the UK market continued to lag its global counterparts as a result of the higher weightings within the UK market to financials, industrials and materials.

• The JP Morgan Emerging Markets fund returned 2.8% over Q1, against its benchmark of 1.1%. Over 12 months the fund had returned -1.2%, outperforming the benchmark by 3.9%, and over 3 years the fund had outperformed its benchmark by 2.7%, returning 10.8%. The Committee noted that emerging market equities lagged developed markets over the period.

• Over the quarter, the BlackRock World Low Carbon fund returned 3.2%, underperforming its global equity market benchmark by 1.6%. Over the past 12 months, the fund’s performance also lagged the benchmark by 3.2%.

• The Capital Dynamics Private Equity fund, based on information provided by Northern Trust, returned -4.8% over the quarter, underperforming its benchmark by 9.5%. Similarly, performance over 3 years was 9% below the benchmark. Considering the fund’s underperformance, the Committee were advised that the average lifespan of private equity was 7-10 years, meaning that these investments were into their extensions. Over their lifespan the investments had performed well, and data focussing on performance since inception would be brought to the Committee to display this. However, the Committee noted that, at the current valuation, it was not worth selling. Thus, the Fund would retain this investment for the foreseeable future which would negatively impact performance. Nevertheless, the weighting of the Capital Dynamics Private Equity fund was small, meaning that the impact on the fund was minimal, accounting for an absolute return of -0.1% over the last quarter.

• The LCIV Baillie Gifford Multi Asset fund outperformed its target of 1.5%, returning 2.2% net of fees over the quarter. However, Performance over the past 12 months lagged its benchmark by 12.3%. The Committee were informed that both Hymans Robertson and London CIV were proactively monitoring this holding. The London CIV had placed the fund on ‘enhanced monitoring’, which constituted the middle monitoring level at London CIV. In addition, a review of Baillie Gifford was currently underway with the conclusions expected shortly.

• The Ruffer Multi-Asset fund returned -1.1% over the quarter, underperforming the benchmark by 2.5%. The negative performance was due to the underperformance of strategies in the fund used to protect against downside risk. However, longer term performance remained strong, largely driven by positive performance of equities despite its relatively small allocation.

• The Alinda Infrastructure and London CIV Infrastructure funds both performed positively, posting double digit returns over the last 12 months and outperforming benchmarks. The Capital Dynamics Infrastructure fund differed, with performance lower than expected. The Committee heard that performance was primarily driven by challenges experienced by one project in particular which represented a material proportion of the fund, which had been previously acknowledged by the fund manager. Despite the underperformance, the fund was mature with a marginal weighting in relation to the overall fund resulting in minimal impact.

• The London CIV Private Debt Fund was in the ‘ramp-up’ phase, as demonstrated in the capital committed vs the total contributed. Thus, it was felt too early to assess performance on a purely percentage basis.

• Over the quarter, the London CIV Multi Asset Credit (MAC) fund returned 2.1%, outperforming its benchmark by 0.6%. At the start of the quarter, the fund performed well as gilt yields fell and prices subsequently rose. Over the past 12 months the fund remained behind benchmark; however, over 3 years the fund was 2.8% ahead of its benchmark return. The underperformance over the previous year was largely attributed to the ‘mini budget’ but it was hoped that over time the asset would become less volatile as would be normally expected.

• The BlackRock UK Gilts mandate was passively managed and aimed to match the FTSE UK Gilts Over 15 Years index. The manager sought to track market returns from fixed interest gilts and the manager had delivered against this objective. As such, the returns achieved were driven by market movements rather than the manager. With the relevant contextual information explained, the performance of the fund was detailed, returning 2.8% as gilt yields fell over the quarter, resulting in a slight increase in the value of the portfolio.

In light of the Fund’s evolving Responsible Investment agenda, the Committee discussed the carbon intensity of the Fund, in which it was demonstrated that overall carbon output was lower than the target and below benchmark by 0.9%. The largest carbon emitter, responsible for 43% of the Fund’s carbon output, was the LGIM Global Equity fund however, the fund made up 55% of the Fund’s overall assets and thus produced less carbon comparative to its size. Conversely, the London CIV Ruffer Multi Asset fund had the largest discrepancy when comparing carbon output to asset size, contributing 25% of the Fund’s carbon emissions despite making up only 11% of the Fund’s assets.

In concluding the monitoring performance update, the Committee were advised of the market background, with particular attention placed on the impact of inflation on the markets. The Committee noted that year-on-year headline CPI inflation in the US and Eurozone fell to 6.0%, and 8.5%, respectively, as the UK measure rose to 10.4%. The equivalent core measures fell to 5.5% in the US as the UK and Eurozone measures rose to 6.2% and 5.6% respectively. Furthermore, UK 10-year implied inflation was 3.8% p.a., 0.2% above end-December levels.

Following the presentation of the report, the Chair invited members to raise any questions or comments, with queries and responses summarised below:

• Regarding the investment in BlackRock’s UK Over 15 years Gilts, the Committee noted that the holding was passive, tracking market conditions exactly. The returns, albeit negative, were in line with the market, with BlackRock not stylistically contributing to the negative performance. The relative underperformance of the fund was due to the volatility of the market and yields increasing, subsequently decreasing prices. However, the Committee were advised that the holding acted as a good diversifier as it was as a hedge against inflation exposure.

• In response to a concern in relation to the viability of real estate due to government legislation on green energy and increased voids, the approach taken towards managing the property portfolio by the active fund managers was outlined. Concerning green energy’s impact on real estate, the Committee heard that this fell under Responsible Investment, which was continually monitored by Hymans to future proof investments and maintain Responsible Investment objectives.

• In requesting further information on the underperformance of the Capital Dynamics Private Equity fund, the Committee noted that it was a mature fund, and it was possible that it was in the ‘run off’ phase.

• Concerning the impact that the Russian invasion of Ukraine had on the UK’s supply of energy and economy, it was illustrated that UK-Russia relations did have an impact on inflation, however, the supply chain was experiencing difficulties prior to the conflict which culminated in a ‘domino effect’ originating from covid until present day.

• In responding to a query on whether the UK economy would improve if the Government announced further investment into green energy to mitigate against the energy crisis, the Committee were advised that the economy largely relied on market sentiment and confidence. It was noted that US performance was largely driven by the tech industry, which the Committee acknowledged presented different environmental, social and governance (ESG) challenges. The Committee were informed that training on a passive ESG fund was in train, and it was explained that the market would likely lean more towards ESG investments as 2050 neared, due to the need to meet climate goals set out in multiple international agreements.

Members welcomed the report and, with no further issues raised, thanked Hymans Robertson LLP for their presentation. Consequently, the Committee RESOLVED to note the report.