Agenda item

To receive the Brent Pension Fund  Q1 2025-26 Investment Monitoring Update Report.

The Chair then moved on to deal with the remainder of the agenda and began by inviting Kenneth Taylor (Senior Investment Analyst, Hymans Robertson LLP) to introduce a report, which outlined the performance of the Brent Pension Fund over the first quarter for the 2025 financial year.  In addition to the performance update, the Sub Committee was advised the report also included an update focussed around the impact on the Fund’s assets following the US Administration’s “Liberation Day” tariff announcements in April 2025 and outlook for the main asset classes and considerations for the Fund.

In noting the outline provided in relation to market background covering the monitoring period the Sub Committee were advised in relation to total Fund performance that the Fund had posted a negative return over the quarter, ending the period with a valuation of £1,310.1m, down from £1,335.8m at the end of Q4 2024.  The Fund’s passive global equity mandates were identified as the main contributors to negative absolute returns over the quarter. UK government bonds had also detracted, as rising gilt yields led to a fall in their value. In contrast, UK equities had delivered positive returns during the period.  On a relative basis the Fund had underperformed its benchmark by 0.1%. The Fund was also behind its composite benchmark over the past 12 months and over 3 years 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 had decreased slightly over the period to £63.6m.  Whilst US tariffs on imports had led to material falls in equity valuations during April it was noted markets had since largely recovered.

As at 31 March 2025, the funding level was estimated to be 131% with the fall in the funding level in Q1 2025 mainly attributable to a decline in asset values driven by market movements.  Members also noted that a formal actuarial valuation was in the process of being carried out (as at 31 March 2025).

Moving on to consider performance relating to Fund Managers, members were advised that the portfolio had delivered a return of -1.6% over the first quarter of 2025 to 31 March, underperforming its benchmark by 0.1%. While performance over the past 12 months and 3-year periods remains strong on an absolute basis, returns had continued to lag the benchmark over both timeframes.  After a period of strong gains, global equities had posted negative returns in Q1 2025 with UK equities the only growth asset class to have delivered a positive return during the quarter. In contrast, emerging market funds had declined and underperformed their respective benchmark.

It was noted that the decline in global equities had been driven by renewed tariff-related uncertainty, which had weighed on investor sentiment. As a result, market participants had rotated out of high-valuation US technology stocks in favour of lower-valued names, leading value stocks to outperform growth. As a result, US equities had experienced their weakest quarterly performance since 2022, contributing significantly to the broader market decline.  Members were advised the property and infrastructure markets had also delivered mixed performance over the period. Property allocations had performed well on an absolute basis, while infrastructure performance had been more varied.

In terms of specific Funds, the Capital Dynamics infrastructure mandate had posted negative returns; however, members were reminded this allocation was now in run down and represented a small portion of the Fund. Credit markets continued to perform well resulting in positive performance from the LCIV MAC fund. Over the period, the bond market had also experienced volatility, resulting in gilt yields increasing over the period. This has resulted in the BlackRock gilts mandate falling in value, since gilt yields had risen compared to end of Q4 levels.

Details were also provided on each mandate’s contribution to the Fund’s absolute performance over first quarter 2025, according to their allocation (including supporting details within the exempt appendix which had been provided for members of the Sub Committee).  Positive contributions to performance over the period had been registered from the LGIM UK Equity fund, the LCIV Baillie Gifford and Ruffer Multi-Asset funds, as well as from the Infrastructure and Real Estate allocations. The primary detractor to performance had been the LGIM Global Equity fund, which represented approximately 41% of the Fund’s total assets. Although the Capital Dynamics Infrastructure Fund also posted negative returns, its allocation was less than 1% of the portfolio and, therefore, had a negligible impact on overall performance.

Kenneth Taylor then proceeded to introduce the second section of the report, outlining and covering events transpiring from April 2^nd onwards in relation to the imposition of US Tariffs on global markets and Fund assets.

The use of tariffs as an economic management tool was explained to the Committee, alongside the US administration’s attempts to use them to boost demand for American goods and services whilst cutting foreign competition with the range of tariffs implemented far wider than initially predicted.

The results of the announcement were swift, with equity markets falling by 10-15%. As a result of subsequent economic pressure, however, a number of tariff policies had been scaled back leading to market recovery by the end of April.  The Sub Committee was advised of the position relating to the impact on Fund Manager valuations and provided with a summary of the outlook in relation to growth and inflation.  Whilst asset values at the start of April had experienced a large swing (£20m) members were assured that these had now largely been recovered and without further US intervention were expected to achieve a healthy recovery.  Summary asset class outlooks were provided in relation to Sovereign bonds, credit, equity and currency with the specific impact on the Fund identified in relation to equity, income and protection assets and market performance updates noted in relation to the position on equities, sovereign bonds, credit spreads, commodities.

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

·            In response to concerns being raised as to whether uncertainty in the US constituted sufficient grounds for divestment from that market, Kenneth Taylor observed that US investment would need to remain a fundamental component of the fund's portfolio. Nevertheless, he emphasised that the unprecedented instability characterising the current environment rendered diversification more critical than in any previous year. This position was predicated on the substantial potential returns and growth prospects offered by the US market, which were deemed too significant to disregard and essential to the Fund's objectives. Kenneth Taylor further noted that several factors contributed to the unpredictability of the US investment landscape. These included the diversification occurring within technology sectors, competitive pricing strategies employed by Chinese firms and rapid development of more cost-effective alternatives to American artificial intelligence software. Such dynamics presented opportunities for investment in alternative markets, particularly given the increasing regulatory scrutiny facing American technology companies and the apparent relocation of infrastructure projects beyond US borders. Kenneth Taylor suggested that the trend of corporations seeking to establish operations overseas created enhanced investment opportunities outside the United States.

·            Views were sought on the potential for further fiscal change to be introduced by the US during the remainder of the current US Administration tenure.  In response, members were advised of the need to recognise the distinction between the approach adopted by current and previous US Administrations and volatility in terms of future policy measures.  The role of the bond market in driving some of the change in approach, following initial introduction of the tariffs, was however noted which it was felt could serve a similar function in signalling to the US government when policy measures exceed acceptable parameters.

·            In addressing member concerns regarding the ongoing impact of wider geopolitical tensions on global markets, officers advised that whilst not able to provide accurate predictions of outcomes, the Fund had been impacted by fluctuations, for example, in oil prices attributable to supply chain challenges, which it was pointed out supported the approach to maintaining a diversified investment portfolio. It was also recognised that as the Fund progressively transitioned towards low-carbon investment strategies, the dependency on oil-related revenues would also be expected to diminish over time.

With no further issues raised, the Chair thanked Kenneth Taylor (Hymans Robertson LLP) for the update and the Sub Committee (having noted the Fund Manager Performance updated included within the exempt appendix of the report) RESOLVED to note the report recognising and supporting the prudent approach adopted towards ongoing diversification within the investment strategy.