Agenda and minutes

Apologies for non-attendance were received from Cllr Gary Stevens. Apologies were also received from Cllr David Jefferys for late arrival.

Cllr Russell Mellor and Cllr Simon Fawthrop each declared an interest as deferred members of the Local Government Pension Scheme.

The minutes for both meetings were agreed subject to the final sentence of Minute 67 (7^th November 2018 meeting) being amended to read:

“Mr Arthur indicated that he would not naturally put forward a passive investment in Fixed Interest.”

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 27^th February 2019.

There were no questions.

The Chairman had no update on matters under Part 1 of the agenda.

Details were provided of the Fund’s investment performance for the third quarter 2018/19. Additional detail was provided in an appended report from the Fund’s external advisers, MJ Hudson Allenbridge.

The market value of the Fund ended the December quarter at £963.7m (£1,045.5m at 30th September). Market conditions led to a significant negative performance for the Fund in Quarter 3 (echoed around the country) with year to date return at 7.94% against a 5.94% benchmark. Details of fund manager performance against benchmarks for the quarter, year to date, 1, 3 and 5 years, and since inception were appended to Report FSD19034. Medium and long-term returns remain particularly strong with the Fund ranking third against the 61 funds in the PIRC LGPS universe for the year to 31st March 2018 (first over three years, second over five years, first over ten years and second over 20 and 30 years).

To implement the revised asset allocation strategy agreed on 5th April 2017 all Diversified Growth Funds and Global Equity assets held by Blackrock would be sold. At 31^st January 2019, the Blackrock Global Equity Fund balance amounted to £10,953,304 and in line with the Sub-Committee’s resolution on 14 December 2017 (“the balance of the Blackrock sale, less £3m required to meet the cash-flow shortfall that had occurred during 2017/18, be invested in the Fixed Income Portfolio”), Members were asked to confirm that the balance of the Blackrock fund be invested in the Baillie Gifford Fixed Income portfolio.

Recommendation 2.1(b) of Report FSD19034 sought agreement to invest the balance of the Blackrock Global Equity Fund in Baillie Gifford’s Fixed Income Portfolio. However, it was suggested instead that the balance (£10,953,304) be transferred to the investment type suggested by Mr Arthur, providing a test case for the investment. Options could be looked at to invest the sum and Mr Arthur would meet Fidelity on 7^th March. The Chairman suggested keeping the sum in Blackrock equities to retain options and for a final decision on the balance to be delegated to himself and Director in consultation with Mr Arthur. Options for alternative fixed interest investments can come back to the Sub-Committee from Mr Arthur’s discussions with Fidelity. As such, Members agreed not to press ahead in selling the Blackrock global equities balance but to await the outcome of the review by MJ Hudson Allenbridge into alternative fixed interest options (for the Sub-Committee’s May meeting). Should something urgent come forward In the meantime it was agreed to delegate any decisions to the Chairman, Vice-Chairman, and Director (in consultation with Mr Arthur). 

Following WM Company (State Street) ceasing (from 2016) to provide performance measurement services to clients for whom they are not custodian, the Council’s main custodian, BNY Mellon, has provided performance measurement information with Pensions & Investment Research Consultants Ltd (PIRC) providing LA universe comparator data. The performance measurement contract with BNY Mellon expires in June 2019 and with no company offering performance measurement, or performance measurement and accounting without  ...  view the full minutes text for item 83.

Printed copies of reports from certain Fund Managers are circulated to Sub-Committee Members with this agenda. Remaining reports will be circulated as soon as possible.

Representatives of Baillie Gifford are expected to attend the meeting for this item.

Baillie Gifford presented their investment report covering management of the company’s Global Equities and Fixed Income portfolios for the Fund. At

31^st December 2018 the total value of both portfolios stood at £426,457,260 which had since risen to some £460m by 28^th February 2019.

Baillie Gifford’s Global Equity portfolio under-performed against benchmark in the past 12 months (a volatile period) but over three years, five years, and since inception it has outperformed the benchmark. Stock is selected for the long-term with Baillie Gifford looking at the fundamentals of companies when selecting. A period of volatility provides a particular opportunity for this approach long term and stocks in Naspers, Prudential and Ryanair were provided as examples. Baillie Gifford often look at companies where conviction is high but their share price has dropped.

To 31^st December 2018, Fixed Income under-performed against benchmark over periods of five and three years and 12 months (the latter showing the greatest difference against benchmark). Against falling Fixed Income yields solid returns had been provided but recent periods were more challenging. Relative returns have also been impacted by emerging market holdings. However, over the long term there has been a positive selection in corporate bonds. Currently, the Fixed Income is allocated neutrally (50%/50%) between Gilts (government bonds) and corporate bonds. 

Although Baillie Gifford’s portfolio performance was volatile there is evidence the market isrecovering and its value rose in early 2019. The long term benefit (of Baillie Gifford’s approach) had proved successful for the Fund. The Chairman considered Baillie Gifford a good example of active management and the Director of Finance indicated that £95m has been returned for the Fund through (Baillie Gifford’s) active management.

On active managers being able to perform well during future volatility and recession, stock market returns are driven by big winners with rapid growth. Baillie Gifford also invests in stable companies such as Prudential. On global factors e.g. China (US/China trade war, slowing economy, reduced GDP etc), Japan adopting a “Japan First” approach, and considerations related to India, Baillie Gifford looked at fundamentals. China is urbanising, the number of patents has doubled, and there is growth in Artificial Intelligence (AI). China’s economy (2^nd largest market), remains structurally strong and it was thought they will become the largest economy at a future point; Baillie Gifford will look at China more in 2019 and plan toopen a Shanghai office.

Concerning reliance on algorithms (with no real understanding of sentiment), Bailie Gifford saw an important human judgement aspect to what they are doing. It is also necessary to consider governance matters. Baillie Gifford management teams use intuition. However, Baillie Gifford is not complacent and use AI for assistance. On concerns about cyber hacking (e.g. of foreign governments and possibly world markets), this is tracked for companies in which they invest. Concerning any Chinese state interference in the stock of Chinese companies, Baillie Gifford understood the risk but there can be market opportunities if a Chinese company is supported  ...  view the full minutes text for item 84.

Report FSD19032

Concerning the Government’s consultation document “Local Government Pension Scheme – Statutory Guidance on Asset Pooling”,appended to Report FSD19032, a proposed Council response was also appended to the report.

The guidance will replace the section at pages 7 to 8 of Part 2 of the Guidance for Preparing and Maintaining an Investment Strategy, issued in September 2016 and revised in July 2017, which deals with regulation 7(2)(d) of the 2016 Regulations. It will also replace the Local Government Pension Scheme: Investment Reform Criteria and Guidance, issued in November 2015.

Overall, the guidance is statutory but will require different levels of adherence. It uses ‘should’ or ‘may’ or ‘are expected’ and the statutory nature of some of the guidance is indicated by sections where pool members or pool companies ‘are required’ or ‘must’ comply. The draft guidance includes some aspects which reflect legislation or regulation and compliance with these is mandatory. Other aspects of the statutory guidance must be complied with, unless there are compelling reasons not to do so, which must be considered against the overall government framework for the LGPF. Some elements will be general guidance which must be considered and should be complied with unless there is good reason not to do so.

The Chairman encouraged Members to provide their comments on the draft response and to respond soon by email to himself and the Director. The Chairman, Vice-Chairman and Director would then meet to consider the responses before submitting the Council’s formal response.

A Member commended the Director for the draft response as presented.

RESOLVED that:

(1)  the response to the consultation document “Local Government Pension Scheme – Statutory Guidance on Asset Pooling” at Appendix 1 to Report FSD19032 be noted;

(2)  the consultation document “Local Government Pension Scheme – Statutory Guidance on Asset Pooling” at Appendix 2 to Report FSD19032 be noted; 

(3)  Sub-Committee Members email their comments on the draft response to the Chairman and Director of Finance;  

(4)  the Director of Finance, in consultation with the Chairman and Vice-Chairman, submits the formal consultation response which will incorporate views expressed by the Sub-Committee; and 

(5)  the final consultation response is to be emailed separately to all Members of the Pensions Investment Sub-Committee and to Mr John Arthur, MJ Hudson Allenbridge, as investment advisor for the Fund.

The exempt minutes of both meetings were agreed.

The Chairman reported back on the LCIV Shareholder meeting, 31^st January 2019. Members also commented on a number of issues under Part 2 proceedings.

Report FSD19031

Having previously considered a report on the due diligence investment review of the London CIV related to their Global Alpha Growth Fund, Members considered the report of an operational due diligence review on the London CIV. Both reviews were undertaken by the Council’s independent investment adviser.

(Democratic Services Note: as the time was approaching 10pm, a vote was taken at the Chairman’s initiative on whether to adjourn or continue the meeting. Upon a vote, a majority of Members voted to continue the meeting and conclude the Sub-Committee’s business on the agenda).

RESOLVED that the commissioned MJ Hudson Operational Due Diligence Review of the LCIV be noted.

Report to be tabled at the meeting.

As depository for the LCIV, Northern Trust provides an independent oversight of assets to protect investors’ interests and provide confidence to them. At the Sub-Committee’s meeting on 13^th September 2018, the LCIV’s Interim CEO, Mark Hyde-Harrison, indicated that it would be necessary to check whether a copy of the Depository’s report can be provided to Sub-Committee Members. Upon L B Bromley following up the matter, the LCIV’s Chief Operating Officer confirmed that the LCIV would be able to provide copies of the Northern Trust’s current annual Depository Review of the LCIV under private (exempt) proceedings of the meeting. 

The LCIV Chief Operating Officer, Mr Brian Lee, attended for the item and copies of the Depository Review were circulated to Sub-Committee Members at the start of the item. As previously agreed with the LCIV, and as a condition for Northern Trust agreeing to provide the report, the copies circulated for Member reference were collected upon conclusion of the item for custody by Mr Lee. Mr Lee also attended to answer questions as Compliance Officer of the LCIV.

Report FSD19033

Members agreed that there appeared no reason for this report to have been published under exempt (Part 2) proceedings and accordingly it was agreed to consider the matter under Part 1 (public) proceedings of the meeting.

At their meeting on 31st January 2019, the LCIV General Meeting passed a resolution to amend theclause within the LCIV shareholder agreement to vary the LCIV’s ‘business purpose definition’. This was toreflect the evolution of the pooling concept. The LCIV summarised the proposal as follows:

The change in the legal definition of business purpose in clause 2 is “simple but important”. It achieves consistency with current expectations of pooling. London CIV will now be defined as “the FCA authorised company” rather than the “FCA authorised operator of an ACS”.

The current wording of Clause 2, of the shareholder agreement is “The business of the Company shall (unless and until otherwise determined in accordance with this Agreement) be confined to acting as the FCA authorised operator of an ACS to provide a collaborative platform through which the Administering Authorities of the LGPS funds can aggregate their pension monies and other investments. The Company will be branded as “London CIV”.

The proposed wording of Clause 2, of the shareholder agreement is “The business of the Company shall (unless and until otherwise determined in accordance with this Agreement) be confined to acting as the FCA authorised company to provide a collaborative platform through which the Administering Authorities of the LGPS funds can aggregate their pension monies and other investments. The Company will be branded as “London CIV”.

The report to the LCIV General Meeting provided context and was appended to Report FSD19033. It was also requested at the General Meeting that all LCIV shareholders sign a letter (copy appended to Report FSD19033) confirming approval to amend the Shareholder Agreement in the way described in the letter and report to the LCIV General Meeting. The LCIV articles and Shareholder Agreement regulate operation of the LCIV.

Although the agreement is not prescriptive on who should sign a document on behalf of shareholders it is common practice for the shareholder representative to have authority to sign such agreements. The shareholder representative can also seek the Sub-Committee’s view prior to any final authorisation.

The Chairman confirmed that he would sign the document (Appendix 1 to Report FSD19033).

RESOLVED that:

(1)  the LCIV letter of 31st January 2019 requiring signature (Appendix 1 to Report FSD19033) be noted;

(2)  the report to the LCIV General Meeting on 31st January 2019 (Appendix 2 to Report FSD19033) be noted; and

(3) the Council’s LCIV shareholder representative be authorised to sign the LCIV letter.

On concluding the meeting, the Chairman thanked Members and officers for their involvement on the Sub-Committee during the previous year. The Chairman also thanked MJ Hudson Allenbridge and a Member offered his thanks to the Chairman.