Agenda item

To receive the Brent Pension Fund Quarter 2 2023 Investment Monitoring Report.

Kenneth Taylor (Senior Investment Analyst, Hymans Robertson LLP) presented the report, which outlined the performance of the Brent Pension Fund over the second 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 £1,125.7m up from £1,116.4m at the end of Q1 2023. Comparing the Fund’s performance against the benchmark over the quarter, the Fund had underperformed by 1%, returning 0.5% vs the target of 1.5%. Nevertheless, when focussing on performance over the last three years, the Fund had overperformed the benchmark by 0.5% which was said to be encouraging. The Fund’s passive global equity exposure was the main driver of positive return on an absolute basis, while the income and protection assets, on aggregate, detracted from the total Fund return. In addition, the cash held by the Fund increased over the period to £29.4m.

Focussing on the Fund’s underperforming assets, the Committee were informed that the managers of Multi-Asset Funds, which were Ruffer and Baillie Gifford in the case of the Brent Pension Fund, had discretion to invest in a wide range of assets. Recently, managers had moved to a defensive position, reducing allocations to equities and moving to bonds. At the time of the meeting, this approach had not resulted in performance gains, as bonds had fallen and equities had risen. Whilst the long-term performance of Ruffer was said to be more credible, the long-term performance of Baillie Gifford was considered disappointing. However, members were reassured that action had been taken to improve the performance of Baillie Gifford as London CIV had placed Baillie Gifford on ‘enhanced monitoring’ and confidence had been gained from recent conversations with Baillie Gifford.

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, the Fund was in the process of selling circa 6% of its equities holdings to purchase bonds assets in order to rebalance the Fund’s risk vs return profile. Members were advised that, whilst bond values were currently in decline, the lower price made bonds a more attractive investment which was the rationale behind purchasing bonds. Regarding the Fund’s income assets, the Committee noted that the Fund was looking to broaden its investments in property, infrastructure and private debt, with the majority of these types of investments currently concentrated in the aforementioned Multi-Asset Funds managed by Ruffer and Baillie Gifford.

Concerning manager performance, Kenneth Taylor detailed that the LGIM Global Equity fund continued to provide positive returns, registering double digit performance over the last 12 months. Given its positive performance and sizeable allocation of circa 45%, the LGIM Global Equity Fund was the largest contributor to performance over the quarter. However, the performance of global equities was offset by the underperformance of both the LCIV Ruffer Multi-Asset Fund and the LCIV Ballie Gifford Multi-Asset Fund, despite their contrasting investment approaches. Furthermore, despite negative returns posted by the Capital Dynamics Infrastructure and LCIV JP Morgan Emerging Market Equities Fund, these mandates had allocations of circa 2% and circa 4% respectively of the total Fund, and hence did not significantly detract materially from the Fund’s overall performance.

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

•         In response to a query as to why data was missing relating to the previous quarter for the Fund’s three infrastructure holdings, the Committee were informed that these investments were long-term investments and thus it was better to assess their performance over a longer period of time. It was explained that assessing performance on a quarterly basis could illustrate high volatility which could be misleading.

•         In questioning the intention to reduce the Fund’s allocations to the LCIV Ruffer and Baillie Gifford Multi-Asset holdings and redirect assets to specific asset classes such as infrastructure and property, the Committee were advised that this was consistent with the Investment Strategy Review approved by the Committee in February 2023.

•         Regarding the planned reallocation of circa 6% the Fund’s global equities holding to bonds, members heard that the Fund would invest into a bond fund who specialised in individual bonds. Currently, the intention was to invest in gilts which was explained to be a mix of government bonds spanning different periods of time. In the medium term, bonds helped balance the Fund’s exposure to risk, but members were advised that different bonds were available such as corporate bonds. However, whilst corporate bonds could deliver high returns, they came with higher risk. A workstream to identify the best long-term bonds investments was suggested as a possibility by Hymans Robertson.

•         In discussing the strong performance of Japanese equities, it was explained that the main driver of the performance was the change in the value of yen comparative to other currencies.

•         In response to concerns regarding the poor performance of the Capital Dynamics Infrastructure holding, the Committee were informed that the poor performance was due to a number of clean energy investments in the US and the intention was to allow this holding to ‘run off’ as the assets were not particularly sellable. Whilst recognising that it may take some time for the holding to completely expire, income would be redistributed to other assets upon the expiry of the holding. Despite the poor performance of the holding in percentage terms, it only constituted 0.2% of the overall Fund and therefore the monetary impact on the Fund was deemed negligible.

•         In highlighting that the technology sector was seeing large growth, members queried whether it was better to invest further in the technology sector rather than investing in property. In response, members heard that companies such as Nvidia and AI related holdings had performed well during Quarter 2. However, the decision of where to invest related to the diversification of the Fund, in which it was explained that it was preferable to invest in a range of asset classes and sectors in order to ensure the Fund’s protection. Whilst the Committee noted that the Fund held technology stocks, as many of the top holdings in global equities were companies such as Google and Amazon, and the Fund would continue to invest in the technology sector, the importance of diversification was reiterated to mitigate against poor stock market performance, and it was outlined that the Fund would look to invest in property as it was agreed in the Investment Strategy in February 2023.

•         In discussing the role of London CIV and the recruitment of managers, the Committee were advised that London CIV were an umbrella organisation that identified managers and asset classes for local authorities in London. It was explained that London CIV had monitoring responsibilities for the performance of their funds and intervened, when necessary, which was illustrated in the steps taken by London CIV in relation to the Baillie Gifford Multi-Asset fund in which the fund was placed on enhanced monitoring and engagement was undertaken to improve performance.

•         As the Committee met every four months, and in highlighting the impact of inflation on members’ pensions, the Committee requested for further attention to be placed on shorter term issues and for performance information to be presented with a narrative that put the data into context. In response, members were informed the sector as a whole had outperformed inflation in the long-term, with the LGPS being a success story over the last 20-30 years. However, in the previous 12 months to 2 years it was detailed that the majority of asset classes had trailed inflation. The Committee noted that officers would explore providing this data for future meetings.

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.