Agenda item

To receive the Brent Pension Fund Q1 2024 Investment Monitoring Report.

Kenneth Taylor (Senior Investment Analyst, Hymans Robertson LLP) introduced the report, which outlined the performance of the Brent Pension Fund over the first quarter of 2024. In introducing the report, he stated that performance was in a positive position overall, with the Fund ending the period with a valuation of £ 1.26 billion, up from £1.2 the previous quarter, representing a 4% return. The Committee heard that the Fund’s equities were again observed as the main drivers of returns, with Legal and General Investment Markets (LGIM’s) global equity mandate as the primary contributor in monetary terms. The Fund’s exposure to UK equities was also reported to have contributed to performance but on a smaller scale. Global equity markets delivered around 20% returns, and the council saw positive net contributions from its UK equity returns this quarter, although this was outperformed by global equities due to the UK’s underweight to the technology sector, which continued to outperform in Q1 2024.

Continuing to present the performance of the Fund for Q1, Kenneth Taylor highlighted that, in relation to Manager Performance, LCIV Baillie Gifford Multi-Asset and LCIV Ruffer Multi-Asset had underperformed against their targets, with performance over the past 12 months and 3 years lagging behind their respective benchmarks. As a result of the Fund’s downgraded rating over the last 12 months, the Committee had agreed to reduce the allocation to the LCIV Baillie Gifford Multi-Asset Fund and consider further recommendations to sell and utilise the proceeds to meet the strategic objectives of the Fund.

In presenting the performance, Kenneth Taylor highlighted that growth assets currently comprised over 50% of the pension fund, but this was planned to decrease over time. The Fund was stated to be looking to move its portfolio to consist of a greater number of protection funds, primarily in bond investments. These were often used to provide portfolios with lower-risk investments that balanced the potential risk from other, more volatile investments. An evaluation of the fund’s investments was noted to be coming in the 2025 valuation to assess liabilities and how they are compared to assets. Investment strategies would also be revisited. Funding levels were discussed next; the Committee discussed current liabilities, and officers' calculations showed a healthy improvement from 2022 to 2024. The performance of tech stocks and stocks from the ‘magnificent seven’ tech companies were stated to be leading the way as a result of the recent artificial intelligence boom. The Committee was advised that 7-8% of fund investments were held in these companies. Whilst these were extremely profitable, officers noted that more diversification was desired going forward.

Regarding the UK equities held by the Council, officers noted they made a healthy contribution to the fund, but Capital Dynamics was not performing as expected. Property holdings through Fidelity and UBS Triton were also key investments reported to be underperforming, the reasons for which were outlined in the agenda document. Within income assets, officers highlighted that both property mandates and multi-asset funds detracted from performance on a relative basis; however, allocations to these assets were much smaller relative to the growth assets. The Committee heard that the Fund’s UK government bond holdings experienced negative performance over the quarter due to rising yields, hence seeing their value fall in monetary terms. The fund's cash held increased over the period to £44.3m. The cash allocation would be used to fund future capital calls and private market investments, such as infrastructure and property investment. Overall, the fund's value had increased quite significantly, and officers were now looking to its future.

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

·             In relation to the trajectory of LCIV Baillie Gifford Multi-Asset, the Committee agreed that reducing the exposure to risk by reducing allocations was prudent but asked what was being done to change their investment direction and how it compared to other local authority pension funds. Kenneth Taylor responded that it was the at the discretion of the Manager to invest in a range of different asset classes and, because of the economic context that managers were working within, many had moved their funds to a defensive position through decreasing their assets and increasing their bond exposure. This would be considered sensible, but assets and bonds had not performed in the way expected which had resulted lower returns than hoped for. Multi-asset funds were disproportionately affecting the view of the fund’s performance, and officers would monitor these developments and adjust accordingly, but it was highlighted that managers could recalibrate their positions to restore their exposure to those markets if they saw recovery in the economy.

·             The Committee asked what the desirable benchmark for the Fund was and what determined this benchmark. Officers responded, noting that it was based on various factors. Benchmarks were largely set by global equity market targets and how other investment funds performed, differentiating depending on the asset class in question. The benchmark was a measure of performance looking at the overall performance and how managers performed against that. 

·             The Committee highlighted that London CIV had not been performing well across the board. Sawan Shah (Head of Finance – Pensions and Companies, Brent Council) confirmed that this had been raised by several London local authorities and came up regularly in monitoring calls Brent had with LCIV.  He explained that many of the equity funds on the London CIV platform were biased towards growth, but growth for active equity managers had not performed well in recent years. Officers further noted that concentration risk was a consistent factor in their evaluations. Brent had been largely unaffected by London CIV’s underperformance as the Fund had not invested in active equity funds due to their investment in passive UK and Global Equity.

·             In discussing the ease of divestment of underperforming investments, officers informed the Committee to keep the funds equity level, any divested assets would usually require a new investment to be made in parallel with the underperforming assets offloading. As a result, it is rare to divest parts of the fund quickly due to the need to have a new investment to cover equity.

·             Noting the profitability of tech investments, Councillor Mili Patel asked if any further AI-related investments were on the horizon. Kenneth Taylor responded that the Fund was looking reduce its carbon emissions and a big step on that journey would be to look at global equity mandate, which would be reviewed over the next 3-6 months. Officers wished for a diversified strategy and suggested that the topic be part of the upcoming carbon review.

·             The Committee asked why Fidelity was in review but not UBS Triton, who also had poor performance over the same period. Officers stated that the approach UBS Triton were taking was highly rated and, whilst their performance had lagged, the way the portfolio was positioned provided a good base for the future. In addition, UBS Triton were known to have a strong management team and a more diverse base of clients. As such, there was confidence UBS Triton performance would improve. In relation to Fidelity, they have faced challenges from private sector clients who are looking to realise property investments where their funding levels were higher than expected. Fidelity had received several sell notices which would result in the value of their Fund reducing from around £450m to £200m. As such, a fund reduction of that size presented a concern around liability, which was why Brent’s Pension Fund had recommended downgrading Fidelity.

·             The Committee asked for further information regarding the underperformance of Capital Dynamics, highlighting that the Fund was looking to sell assets for Baillie Gifford but not Capital Dynamics. Kenneth Taylor responded that Capital Dynamics had illiquid assets which were difficult to sell.  The funds were coming to the end of their life and in wind down stage with no further allocations to private equity. Sawan Shah highlighted that the long-term figures for Capital Dynamics returns had been positive since the Fund invested in 2005 and had performed well over a very long term period. In the last 2-3 years, they had not been returning at the same level because it was a very mature fund compared to the returns of those in the middle of their investment stage.

·             The performance of BlackRock UK Gilts was discussed next. Kenneth Taylor explained that the protection allocation was designed to balance the risk and return profile and provide stability, but the steep rise in interest rates over the past 2 years and negative market trends had led to the poor performance.

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.