Printed copies of reports from the Council’s Fund Managers are circulated to Sub-Committee Members with this agenda. Representatives of Baillie Gifford and Fidelity will be attending the meeting for this item.
Minutes:
Mr Kenneth Barker attended from Baillie Gifford to provide a Pension Fund update, with specific reference to Fixed Income and the Diversified Growth Fund.
Mr Barker commenced with a general economic overview and stated that most asset classes had delivered good returns over the quarter. There had been a mixed bag of economic news, headlined by the collapse in the oil price and deflation. Quantitative Easing (QE) had been introduced in the Eurozone, and there had been big moves in foreign exchange rates during the quarter, with the dollar strong against most currencies. Corresponding to a decline in inflation, bond yields had fallen to record low levels.
Mr Barker informed the Committee that the return on the DGF (net of fees) to 31/03/15 was +7.9%, and over the past five years was +6.5% on an annualised basis. Volatility over the past five years was 4.4% per annum, and the return on the fund (net of fees) over the last quarter was 3.2%.
It was the case that in the first quarter of 2015, the best performers in the DGF were listed equities, active currency, high yield credit and absolute return.
Mr Barker stated that there had been a degree of volatility in the last quarter connected to a weakening of the Euro, and that funds were not hedged in the Equity portfolio.
Mr Barker informed the Committee that Baillie Gifford were looking with interest at countries like India which had good reform agendas and strong economic growth. A Member enquired if that meant that the Fund was exposed to currency volatility with respect to the Rupee. The answer to this was yes, currency was taken into account but not hedged. Mr Barker continued by explaining that recent USA gains had been partly via currency, and that it took around three to five years for currency to stabilise; it was also the case that the FTSE market was globalised.
A Member asked what sort of returns were coming from the Emerging Markets (EM). Mr Barker answered that currently the returns were good-around 7%. It was also the case that trends were favourable for EM as these countries did not have a debt problem. Countries that were previously regarded as “safe” were now vulnerable because of debt problems. It was the case that EM countries were in a crisis in the 90’s, but their fiscal situations had now stabilised.
Mr Barker explained about asset classes and local currency bonds. He explained that hard currency was measured in dollars, and the other option was to use local currency bonds which were bonds issued against the local currency of the issuing country. He felt that it was better in these cases to go down the local currency route, as banks liked to issue bonds and to lend based on their own currency. It would be expected that the currency would appreciate, and that subsequent industrial output would improve economic productivity. Some profits would be lost to inflation, and it was important to actively manage these positions.
It was noted that local currency bonds could be hedged as the issues were clearer.
The Chairman thanked Mr Barker for his informative and thorough presentation.
Mr Paul Harris and Mr Rob Marsden attended the Committee as the representatives from Fidelity. They attended to provide an update on the current Fixed Income Fund that they were managing for LBB which was the Fidelity Institutional UK Aggregate Bond Fund, and also to provide more information to the Committee with respect to the Fixed Income Diversified Alpha Fund (FIDA). It had been recommended at the last Committee meeting that funds be transferred from the Aggregate Bond Fund to the FIDA Fund, but this had been put on hold pending tonight’s update. The current value of the Aggregate Bond Fund as at 31/03/2015 was £66.6m.
Mr Marsden outlined the strategy of the FIDA fund, and explained that it employed an absolute return strategy that was not restrained by traditional benchmark bound performance objectives; investors were offered returns relative to cash. He described the Fund as blending a global macroeconomic outlook with Fidelity’s bottom up approach to investing. He felt that the Fund offered a best ideas approach and offered attractive risk adjusted returns.
Mr Marsden stated that the main benefits of the FIDA Fund were:
· Low volatility and attractive risk adjusted returns
· Diversification
· Strong capital preservation
· Liquidity management focus
A Member enquired what sort of liquidity existed in the FIDA Fund, and the response to this was that there was daily liquidity.
The Chairman asked how the Fund performed during the recent period of bond volatility. Mr Marsden responded that the portfolio had to be rebalanced—the Fund took a hit but was resilient.
A Member enquired if the FIDA Fund was an investment in Derivatives. Mr Marsden answered that the Fund invested in “money market instruments”, and that these were AAA credit rated instruments. These were short term bonds used as collateral against Derivatives. A member enquired what sort of risk was attached to these bonds, and the response was that they were high quality instruments. The member also asked why bonds were used and not cash as collateral. Mr Paul Harris commented that the Fund used Bonds with equal and opposite views, and that in effect there was an overall zero risk balance because Fidelity would be running a neutral position. He added that it was not possible to get returns without some risk.
The Director of Finance asked how the “absolute return” aspect of the FIDA Fund differed from the Aggregate Bond Fund. The response to this was that the FIDA Fund was driven by both long and short ideas, rather than by the market. It was also the case that the Fund was market neutral. The Director enquired what the fees were for managing the Fund, and the answer was that the fee was 0.4%, but Fidelity offered flexibility on this. The Director also asked how confident Fidelity were with the target return of 1.5 to 3% over cash. Mr Marsden responded that it was expected that the market would start to ride on fundamentals after exposure to QE, and Fidelity were confident of hitting this target.
The Chairman asked for any other comments on the quarterly report. Mr Marsden responded that the last quarter was routine, and that the portfolio had performed well.
The Chairman thanked Mr Marsden and Mr Harris for their detailed and informative presentations.
RESOLVED that the presentations from Fidelity and Baillie Gifford be noted.