Agenda and minutes

Apologies were received from Cllr Simon Jeal and Cllr Kevin Brooks attended as alternate.

Apologies for attendance were also received from Mr Geoffrey Wright as a Member Representative of the Local Pension Board.

There were no declarations.

The minutes were agreed.

In accordance with the Council’s Constitution, questions to this

Sub-Committee must be received in writing four working days before the date of the meeting. Therefore please ensure that questions are received by the Democratic Services Team by 5pm on Wednesday 16^th May 2018.

There were no questions.

Report FSD18042

Details were provided of the Fund’s investment performance for the fourth quarter 2017/18 with additional detail provided in an appended report from the Fund’s external advisers, AllenbridgeEpic. Information on general financial and membership trends of the Pension Fund was also outlined along with summarised information on early retirements.

The market value of the Fund ended the March quarter at £970.7m and had increased to £983.6m as at 30^th April 2018.The total fund return for the fourth quarter was -2.39% against a benchmark of -2.62%, compared to an average -3.6% across the 61 LGPS funds in PIRC’s universe. Overall, medium and long-term returns for the Fund remained particularly strong with returns of 6.7% for 2017/18 and 26.8% for 2016/17 against a benchmark of 3.1% and 24.6% respectively.

Concerning the revised asset allocation strategy and appointments of Schroders (60%) and Fidelity (40%) to manage the Multi Asset Income (MAI) allocations and Fidelity to manage the property fund, initial drawdown for the Fidelity MAI and property fund was completed in February 2018 and the Schroders MAI investment was due to complete on 25^th May 2018.

A Q4 summary of manager performance was also appended to Report FSD18042 with the Council using its main custodian, BNY Mellon, for performance measurement information. PIRC currently provided LA universe comparator data with 61 of the 89 LGPS funds signed up to the service, including L B Bromley. Details of the final outturn for the 2016/17 Pension Fund Revenue Account were also appended to the report along with the provisional outturn for 2017/18.

A timetable of Fund Manager attendance at future meetings was also outlined as follows:

24^th July 2018 – MFS (global equities)

13^th September 2018 - Schroders (multi-asset income)

7^th November 2018 – Baillie Gifford (global equities and fixed income)

5^th February 2019 – MFS (global equities).

In discussion, Allenbridge summarised the Fund’s performance highlighting its very good long term performance and its position as one of the best performing LGPS funds. Background was also provided to the recent asset allocation review and decisions to place funds in the MAI and Property mandates.

Although the Fund’s value fell to £970.7m, an outperformance of 0.23% was achieved for the quarter even though global equity markets had been undermined in mid-February. With weak bond markets, strong economic growth, and rising inflation, particularly in the US, an expected rise in interest rates led to the US equity market falling 10% from peak to trough in the following two weeks. All major equity and bond markets were down for the quarter as a whole. 

Since Q4, the fund’s value had increased and markets were seeing an increased level of stability. Even so, with the substantial Q4 turbulence, Allenbridge suggested (in their report) that 2018 might not be as smooth as 2017. Members were advised that some instability could also remain as central banks continue to remove stimulus to economies such as Quantitative Easing. Nevertheless, Allenbridge suspected  ...  view the full minutes text for item 38.

Printed copies of Fund Manager Reports will be circulated to Sub-Committee Members upon the Sub-Committee being re-constituted and Members of the Sub-Committee being appointed.

Representatives of Fidelity will be attending the meeting for this item. 

Quarterly reports from Fund Managers had been circulated to Sub-Committee Members and Members of the Local Pension Board (for information) prior to the meeting.

Representatives from Fidelity attended the meeting to report on the performance of its mandate in Fixed Income (UK Aggregate Bond) Multi-Asset Income (Diversified Income) and Property (UK Real Estate).

Diversified Income

Fidelity’s Diversified Income portfolio for the Fund was launched on 21^st February 2018 with an initial mandate size of £80m and a target income of 4% (with no benchmark). A flexible investment approach is taken to navigate changing market environments, balancing income and total return with risk and liquidity.

Income for the portfolio is earned from Growth assets (Equity, Infrastructure, Real Estate, and Catastrophe Bonds), Income assets (Government Bonds, Investment Grade Bonds, Hard Currency EM Debt, Mortgages/ABS, and Cash), and Hybrid assets (Local Currency EM Debt, Loans/CLOs, Hybrid Bonds and High Yield Bonds).

Income assets aimed to deliver steady income with capital preservation characteristics, tending to perform better in recessionary phases when GDP growth is subdued and inflation falling. Hybrid assets deliver an attractive yield with potential for capital growth, tending to outperform in early recovery periods. Growth assets are the most volatile, aiming to deliver capital growth with income, and tending to perform better in phases of robust economic expansion and rising inflation. Investment ranges for the asset groups comprised: Income assets 20-80%; Hybrid assets 0-55%; and Growth assets 5-40%. As at 31^st March 2018, Diversified Income comprised: Income assets (yield 2.8%) at 35.5%; Hybrid assets (yield 5.6%) at 32.8%; and Growth assets (yield 4.3%) at 31.7%. Mr Arthur indicated that the Fund could afford to increase diversification at the expense of a reduction in overall returns in view of its good level of funding (approximately 100%).

For standard period returns to 31^st March 2018, Diversified Income achieved a one month return of -1.2% and achieved a return since launch of -1.0%. A strong period of economic growth is now plateauing with markets becoming more volatile. As such, Fidelity is looking to have more defensive instruments for the portfolio and low volatility assets. These include instruments such as hedges to dampen volatility and more fixed Income assets going forward. The portfolio was built to withstand a challenging environment and is well diversified across asset classes, regions and capital structure. Fidelity also favoured Alternatives where good yield and diversification opportunities can be found. Emerging market local currency debt, loans and financials are high conviction areas. 

Fidelity had increased equity market hedges for the portfolio since the end of March by adding to hedges in the UK equity market and technology sector. They had also trimmed exposure to European high yield bonds and added to US investment grade bond exposure. Additionally, Fidelity had taken a new holding – Chenavari Toro Income Fund Ltd. Fidelity expected to become defensive on equity allocations at an appropriate point in the future.

UK Real Estate

An expected income distribution of 4.5 to 5.0% p.a. was forecast over  ...  view the full minutes text for item 39.

The exempt minutes were agreed and Members considered two matters referred to in the minutes.