Agenda item

To receive the Brent Pension Fund Q3 2024-25 Investment Monitoring Report.

The Chair then moved on the remaining items on the agenda and welcomed James Glasgow and Malcom Olsson (Hymans Robertson) who introduced a report, which outlined performance of the Brent Pension Fund over the third quarter of 2024-25. The Key points highlighted during the report are summarised below:

In introducing the report Malcolm Olsson began by providing a brief market overview and summary of the previous six months of the Fund’s investment performance, before detailing Brent Pension Fund's assets and liabilities.  The regional equity performance within the Fund was noted to have varied significantly, with North American equity leading while Europe (excluding UK) had performed more negatively at -3.8% and UK equities having shown a moderate performance of approximately 1.9%.  The rise in interest rates was also noted during Q4 which had directly impacted UK gilts with energy and basic materials having been the main detractors within global equity sectors. Factors affecting performance also included uncertainty from the recent North American election and decreasing oil prices which were adversely affecting energy industries. Consumer discretionary sectors had been observed to have performed well, which was noted as expected during a time of economic growth.

Moving on to consider Total Fund performance, the Sub Committee were advised of positive returns at 3.9% over the last six-month period. The Fund had posted a positive return for much of the quarter, ending with a valuation of £1,335.8m, up from £1,279.2m at the end of Q2, and £1,304.4m at the end of Q3 2024.  The Fund's passive global equity exposure had been the main driver for positive returns on an absolute basis, along with exposure to UK and emerging market equities. Within the income assets, the Fund's private debt and property exposure had contributed to performance on an absolute basis with the main detractor being the Fund’s government bond exposure, which had fallen in value as gilt yields had risen over the period.  On a relative basis, Members were advised that whilst assets had combined to return 3.9% over the second half of 2024, the Fund had underperformed its return benchmark by 0.2% and was also behind its composite benchmark over the past 12 month and 3 year period with members noting the current target and asset allocations exposure on an interim and long term basis across growth, income/diversification and protection plus cash and reflecting the Funds Investment and diversification Strategy. Cash held by the Fund had increased over the period to £65 million, with no major changes in asset allocation during this time and Funds identified as having performed in line with market trends.  This included not only a focus on Global Equity but also Multi Asset, Property and Infrastructure investment allocations which were aimed at reducing volatility.  It was noted that global equities had performed well, with a small increase in valuations across the board for total growth assets.  In terms of asset allocation, members were advised that the LCIV Infrastructure Fund had continued it distribution phase with cash proceeds of £6.7m also returned to the Fund following the decision made in relation to the Capital Dynamics liquidity options relating to their private equity mandate.  Following approval, the rebalancing of holdings to move to the long term target by reducing the allocation to LCIV Baillie Gifford Multi-asset fund and investing £18m in the LCIV JP Morgan Emerging Markets Fund and £15m held in cash had now been reflected in the asset valuations. Other transaction activity had included the LCIV Private Debt Fund nearing the end of its investment phase for which distributions were expected to commence after March 2025.

In terms of the funding level, this had been estimated (as at 31 December 2024) to be 134%.

Malcolm Olsson then moved on to provide an outline of performance relating to Fund Managers.  Members were advised Global equities continued to provide positive returns with UK equities currently underperforming the global market but the property and infrastructure markets generally performing well on an absolute basis over the period. Whilst the Capital Dynamics infrastructure mandate had continued to post negative returns it was noted this allocation was in run down and represented a small allocation within the Fund.  Yield volatility had also remained with the BlackRock gilts mandate having fallen in value over the quarter as gilts yields rose compared to Q2 levels.  Credit markets had continued to perform well resulting in positive performance from the LCIV MAC fund.  Details were also provided on each mandate’s contribution to the Fund’s absolute performance over the second half of 2024, according to their allocation (including supporting details within the exempt appendix which had been provided for members of the Sub Committee).  The largest contributor to performance over the period remained LGIM’s Global Equity fund, given its positive performance and its allocation of c.40%.  The Fund also saw positive contributions to performance from the LGIM UK Equity Fund, LCIV JP Morgan Emerging Markets Fund, BlackRock World Low Carbon Fund, and LCIV Baillie Gifford Multi-Asset, Infrastructure and MAC Funds.  The main detractor from performance remained the BlackRock UK Gilts Fund, making up 8% of the Fund’s total assets.  Despite negative returns posted by the Capital Dynamics Infrastructure Fund, members were assured this mandate had a relatively small allocation of less than 1% and had not therefore detracted materially from the Fund’s overall performance.

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

·       In seeking further clarification on the allocation of Fund assets and performance of Fund Managers details were sought on the position regarding the Capital Dynamics Infrastructure Fund which James Glasgow (Hymans Roberston) confirmed was in the process of being wound down. Members were reminded this represented a relatively small allocation of less than 1% in terms of the Funds overall mandate and would not therefore detract significantly in absolute terms of overall performance.

Confirmation was also provided in relation to the performance of the Alinda Infrastructure Fund.

·       Following on, details were also sought on the reasons for the negative performance identified in relation to the BlackRock UK Gilts Fund and volatility in the gilts market.  In response, James Glasgow advised that BlackRock UK Gilts Fund had been designed to operate as tracker Fund following the UK index. Highlighting that the bond market had experience significant volatility following the UK election and Autumn budget, members were advised this had resulted in gilt yields increasing over the period with the BlackRock gilts mandate falling in value as a result of the gilts yields rising with the impact of higher interest rates also identified as a factor.  In clarifying the role of gilts in the investment portfolio, members were also advised of the importance of maintaining a diversified investment strategy.

·       As a final issue, members advised they were keen to explore the analysis undertaken by Fund Managers in relation to macroeconomic conditions impacting on their investment portfolios with the recent example provided of the underperformance in terms of basic materials and energy within the global equity sector driven by manufacturing weakness and falling oil prices.  In noting the uncertainty created following the US Election, it was also highlighted that this had positively affected sectoral performance in areas such as consumer discretionary, financials and industrials. In recognising the issues highlighted, James Glasgow assured members that the performance of Fund Managers continued to be subject to regular and ongoing review which would include how trends around macroeconomic conditions continued to be monitored and used to support investment decisions.

With no further issues raised, the Chair thanked and Malcolm Olsson and James Glasgow for their update and the Sub Committee RESOLVED to note the report.