Agenda item

To receive the Brent Pension Fund Q2 2025 - 26 Investment Monitoring Update Report.

The Chair invited James Glasgow (Hymans Robertson) to introduce a report, which outlined the performance of the Brent Pension Fund over the second quarter for the 2025-26.

In noting the outline provided in relation to market background covering the monitoring period the Sub Committee were advised that equity returns had remained volatile following announcements from the US Administration on Liberation Day, although this position had stabilised as nervousness within the markets had been short-lived, partly due to the backtracking by the US Administration with markets recovering earlier losses.  Having recovered initial loses members were advised that global equities had actually finished up 9.4% in local currency terms. This performance was attributed to investor confidence and was strongly supported by mega cap tech stocks. The only outlier had been overseas bonds, which had fallen 1.7% following a surge in yields triggered by the US Administration's announcements of larger-than-expected reciprocal tariffs, which had also created nervousness in bond markets. Regarding the market backdrop over the quarter, James Glasgow reported that US GDP contracted 0.5%, down from 2.4% in Q4. However, this represented a somewhat distorted picture due to a surge in imports before April's tariff announcement, as companies attempted to complete purchases before the tariffs took effect. From an inflation perspective, CPI inflation rose to a greater than expected 3.4%, driven in part by energy price cap hikes. Interest rates in Europe were cut twice to 2%, while the Bank of England reduced rates from 5.25% to 4.25%, with a further reduction of 0.25% near quarter end, bringing rates to 4%.

In relation to total Fund performance members were advised that the Fund had posted a positive return over the quarter, ending the period with a valuation of £1,360.6m, up from £1,310.1m at the end of Q1 2025.  The Fund’s passive global equity mandates were identified as the main contributors to positive returns this quarter, reversing their position as the largest detractor in Q1. UK equities and emerging markets had also added gains, while property and credit had provided modest support. UK government bonds were broadly flat as long-dated gilt yields had shown little movement.  On a relative basis the Fund outperformed its benchmark by 0.1%. The Fund continued to remain 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.  The LCIV Private Debt II Fund had been funded across April and May 2025, valued at £17.1m as of end of Q2 2025.  Cash held by the Fund had had decreased over the period to £46.1m.

Moving on to consider performance relating to Fund Managers, members were advised that the Fund had delivered a return of 3.9% in Q2 2025, outperforming the benchmark by 0.1% which were based on long-term target allocations, and following the actuary evaluation and strategy review to be discussed later in the closed section of the meeting, these allocations could potentially shift and be adjusted accordingly.  This position had been supported by the rebound in Global equities during Q2, led by large US technology companies, with Asia (ex-Japan) also performing well. Emerging markets had also posted positive returns, helped by easing trade tensions and a weaker US dollar, which supported investor confidence. All equity allocations had performed well in this environment, including the LGIM Global Equity and LGIM UK Equity allocations, with the LCIV JP Morgan emerging markets allocation the strongest performer during the quarter.  Government borrowing costs for medium-term UK gilts had also fallen slightly, which had lifted bond prices and provided a small gain for the BlackRock Gilts mandate although it was noted very long-term yields were broadly unchanged, leaving long-dated gilts close to flat overall.  In contrast, credit markets were calmer, with risk premiums narrowing in the US and euro areas while sterling investment-grade spreads were broadly steady. This supported the LCIV Multi-Asset Credit fund.  Within real assets, UK property had delivered another modest positive return, with industrial and retail sectors ahead of offices supporting the property allocation. The Capital Dynamics infrastructure exposure remained small and in run-off, so members were again advised its effect on overall results was limited.  Members noted that the combination of rising equities and steadier bond markets during the quarter was also supportive for the LCIV Baillie Gifford and Ruffer multi-asset allocations.

In terms of specific Funds, details were also provided on each mandate’s contribution to the Fund’s absolute performance over second quarter 2025, according to their allocation (including supporting details within the exempt appendix which had been provided for members of the Sub Committee).  Members noted the positive contributions from the LGIM Global Equity fund, which had been the largest driver of returns during quarter having been the main detractor in Q1. Additional gains had come from the LGIM UK Equity fund, the LCIV JP Morgan Emerging Markets fund, and the LCIV Baillie Gifford and Ruffer Multi-Asset funds, alongside steady contributions from property and credit allocations. The only notable detractor had been the Alinda Infrastructure fund, although members were advised this impact would be minimal given its small weighting.

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

·            Regarding how investment benchmarks were calculated, members asked officers to explain this process. James Glasgow explained that long-term benchmarks formed part of the strategy review undertaken in 2022, which considered sectors, long-term risk, objectives, and the appropriate allocation for each asset sector within the overall fund, taking into account background economic factors. Reference was made to the details provided within the report circulated with the agenda (page 33 of the agenda pack) which had outlined the benchmarks and performance targets for each of the Fund Managers.  Sawan Shah further clarified the review process in relation to the property holdings with these Funds using an industry standard benchmark tracked across the sector.

·            Moving on to cover the Ruffer Multi-Asset Fund Performance and Capital Dynamics, the improvement in performance of the Ruffer Fund was welcomed with details sought on the turnaround plan for Capital Dynamics.  It was explained by officers that the Capital Dynamics fund was a liquid private asset that had now matured and was in its run-down phase to exit the fund.

·            Regarding the impact of tariffs and USA market volatility, James Glasgow highlighted the need to retain a longer-term focus given the nature of Pension Fund investments.  Whilst short term adjustments had been noted due to market volatility the market’s initial reaction after Liberation Day had become progressively smaller and more resilient to the ongoing situation.

·            Moving on to discuss the Government Pooling Strategy impact, details were sought on how it was felt this would impact the Sub-committee’s role and remit in terms of management of the Fund.  James Glasgow explained that as a result of the pooling arrangements the remit was expected to shift to one of strategy oversight in terms of investment decisions which would be managed through the pool with a comprehensive package provided for oversight and holding pools to account.  The Committee would still be responsible for review, development and monitoring of the Funds overall, which Hymans Robertson would continue to support pending the Government’s longer-term aim for the Pools to provide that type of investment advice. An upcoming LCIV update would also be detailing discussions and agreements relating to the changes, confirming that strategy and monitoring would become the committee's primary focus.

·            As a final issue, details were sought on the performance on funds being managed through LCIV, which James Glasgow confirmed had seen an upturn in returns, although it was difficult to determine whether this was cyclical or due to fundamental portfolio improvements.

With no further issues raised, the Chair thanked James Glasgow (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.