There were no apologies.

Interests were declared by virtue of deferred membership of the Local Government Pension Scheme as per those previously notified (for the Register of Interests). 

The Minutes were agreed.

In so doing two matters were raised. The first concerned the LCIV receiving any additional permissions under their Phase 3 of development which could lead to investments being managed on behalf of boroughs. The Chairman explained that the LCIV’s Financial Plan had been raised in principle at the October Meeting of the LCIV Shareholder’s Committee.

The second matter concerned the LCIV’s Depositary. With the LCIV Interim CEO previously confirming Northern Trust as the LCIV’s Depositary, it was minuted that a check would be necessary on whether a copy of the Depositary’s report could be provided. This remained outstanding and it was agreed that the matter should be reflected as a continuing action point for the current minutes (ACTION: LCIV/Director of Finance).

In accordance with the Council’s Constitution, questions to this 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 Thursday 1^st November 2018.

There were no questions.

Report FSD18086

Details were provided of the Fund’s investment performance for the second quarter of 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 September quarter at £1,045.5m (£1,017.9m at 30^th June). The quarter total fund return was +2.84% against the benchmark of +3.36%. Detail on performance by individual fund managers was appended to Report FSD18086. 

The Fund’s medium and long-term returns remain very strong overall - the Fund ranking third in the PIRC LGPS universe for the year to 31^st March 2018, first over three years, second over five years, first over ten years and second over 20 and 30 years. In addition to winning the LGPS Investment Performance of the Year in 2017, the Fund has also recently won the LGPS Fund of the Year (assets under £2.5bn) in 2018, recognising the consistent high performance of the Fund.

Information on general financial and membership trends of the Pension Fund

was also outlined along with summarised information on early retirements. Final outturn details for the 2017/18 Pension Fund Revenue Account were included as was the second quarter position for 2018/19 and fund membership numbers. A cash surplus for the Fund of around £3m is expected for the year.

For the Sub-Committee’s meeting on 5^th March 2019, it was proposed to invite Baillie Gifford (global equities and fixed income) with MFS invited to the Sub-Committee’s following meeting (currently set for 23^rd May 2019).

John Arthur (M J Hudson Allenbridge) commented on the Fund’s performance for the quarter. Reference was made to the Fund’s increased value although underperformance from Baillie Gifford’s Global Equity portfolio (accounting for over 40% of the Fund’s assets) returned at 3.4% over the quarter leading to the Fund underperforming its benchmark by 0.5%. The quarter had not favoured Baillie Gifford’s approach to investment growth and they had now underperformed over a couple of quarters. In view of the economic/market outlook, Baillie Gifford could be expected to struggle a little in future (but long term the portfolio had performed very well and continued to hit its long term performance target).

Conversely, MFS outperformed during the quarter on the Fund’s other Global Equity portfolio and MFS were now more stable following a period of poor performance (MFS invests in a different manner to Baillie Gifford and was selected because of this diversification of investment philosophy and approach).    

On economic outlook, a period of falling growth and rising inflation will be difficult for equities and fixed rate bonds. Events can happen to take the economy into different phases (e.g. Stagflation, Reflation, Deflation, increased productivity) causing uncertainty. In the U.S. The President tended to act specifically for the U.S. and economic growth. Mr Arthur was optimistic of having economic growth; however, recession was further away but when it occurs it could be more extreme.

The Fixed Interest portfolios and their value were discussed. Fixed interest provided diversification  ...  view the full minutes text for item 67.

Printed copies of reports from the Council’s Fund Managers are circulated to Sub-Committee Members with this agenda.

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

Representatives from Schroders (Multi-Asset Fund Manager and Client Director) attended to present their investment report. 

The Schroders ISF Global Multi-Asset Income (MAI) fund sets out to achieve a sustainable, stable investment outcome with an income objective of 4 to 6% p.a. over a market cycle and an expected volatility of 5 to 7% p.a. The Fund had returned 4% p.a. since inception (GBP hedged). 

The previous three months had been challenging for performance. At 30th September 2018, the Year to Date (YTD) contribution to return for Schroders MAI fund provided a 0.3% portfolio return in U S Dollars (Gross of Fees) and a return of -1.0% in GBP (Gross of Fees). Broken down, equity contributed 0.7% return, Fixed Income contributed -0.4%, Alternatives contributed 0.4% and cash and currency contributed -0.3%. Equities had been a driver for the marginal returns but fixed interest is challenging as interest rates are rising. Alternatives behave differently from other classes and are inexpensive, providing good returns in October. For cash and currency, sterling was a little difficult in view of Brexit but the risk had been managed. 

Details were provided of current allocation and yield by asset class (allocations at 31^st October 2018 and yields at 30 September 2018). Over the next four years, a yield of between 4% and 6% was expected. The presentation also illustrated the current portfolio composition with 26.9% allocated to equities, 49.6% to fixed income, 18.9% to alternatives and 4.5% to cash. 

Although asset class returns for 2017 exceeded Schroders expectations, 2018 is proving more difficult. In 2017 only one asset class failed to return above 0% (US dollar) but so far in 2018 seven asset classes are failing to return with just five asset classes doing so i.e. US Tech Equities (9.8%), Oil (8%), US dollar (5.4%), US Equities (3%) and High Yield Debt (0.9%). October in particular had proved negative with only the US dollar asset class (2.1%) and Gold (2%) positively returning. 

Concerning Schroder’s view of global growth, this was forecast to be 3.3%for 2018 and 3% for 2019. Risk cycle trend data from 1978 to date for both the Business Cycle Indicator (BCI) and a US output gap model also suggested that an expansion stage is currently being experienced (particularly in the U.S.). However, this was not good for fixed income with global inflation gradually rising (and inflation rising faster in the U.S.). Central banks were also starting to raise interest rates slowly and Quantitative Easing had ended. With interest rates rising, Schroder’s needed to be more creative (in obtaining returns). The presentation also showed that monetary policy is normalising with details provided on how value is being sought in equities (US equity valuations look extended and assets are inexpensive in the U.S). Buying cheaper assets was thought beneficial.  Further details showed how a granular approach is being taken to fixed income (capitalising on market dislocations and inefficiencies).

Information was also provided on: alternative assets; current risk adjusted yield for the Global MAI strategy against  ...  view the full minutes text for item 68.

Report FSD18081

Members noted the Annual Report of the Local Pension Board.

RESOLVED that the contents of the Local Pension Board Annual Report (dated October 2018) appended to Report FSD18081 be noted.

Members received Part 2 minutes of the Sub-Committee’s previous meeting and the Chairman requested that future Sub-Committee meetings include “Chairman’s Update” as a regular item (ACTION: Democratic Services).

The opportunity was also taken at this point to apprise the Sub-Committee on certain matters under Part 2 proceedings of the meeting.

(Report withdrawn)

The report for this item had been withdrawn. It was considered too soon to look at recommendations for L B Bromley to enter into a Pension Guarantee Agreement (requested by the LCIV and City of London) and Pension Cost Recharge Agreement (requested by the LCIV) related to the pension liability of LCIV employees in the LGPS scheme. Further legal information was necessary and the matter would not be considered at the present time.