Printed copies of reports from the Council’s Fund Managers are circulated to Sub-Committee Members with this agenda. Representatives of Baillie Gifford will be attending the meeting for this item.
Minutes:
Quarterly reports from Fund Managers had been circulated to Sub-Committee Members and Members of the Local Pension Board with the meeting agenda pack.
A representative from Baillie Gifford attended the meeting reporting on the performance of its portfolio in Global Equities, Diversified Growth Funds and Fixed Interest. Net figures were provided throughout the presentation.
The total portfolio had a valuation of £456,520,316 at 15th May 2017 with previous valuations at 31st March 2016 and 31st March 2017 comprising £344,642,947 and £441,459,809 respectively. Against market developments (e.g. equity markets continuing to perform, a growing economic confidence in Europe, growth by technology companies and a loose monetary policy) and world regional and sector returns in various categories of stock, Baillie Gifford provided details of investment returns to 31st March 2017 with a strong performance from technology stock. U.S. industrial names also performed well. A number of healthcare holdings had, however, detracted from performance. Under the new U.S. administration deregulation was proceeding so providing a fiscal boost. In the U.K. an 18% fall in the value of sterling following the referendum benefitted companies and provided a good trading climate.
The presentation outlined the focus of Baillie Gifford’s 2017 research agenda for Global Equities. This covered the improving U.S. economic position and a particular focus on interest rate rises, tax cuts, infrastructure spending and regulatory change. It was anticipated the Federal Reserve could increase interest rates. Technology platforms also featured in Baillie Gifford’s research (e.g. capital light business models, strong network effects, stakeholder engagement and emergent areas) as did a focus on re-emerging markets with improving governance and new trade routes (e.g. structural reform focusing on China, India, Brazil and South Korea with expanded trade routes along the old “Silk Road”). Further Baillie Gifford research focussed on healthcare demands and looking at areas such as harnessing new technologies and delivering better care at lower cost – the sector was also considered well positioned for regulatory change.
For Diversified Growth, the portfolio achieved a 5.5% p.a. net return to 31st March 2017 since initial investment in December 2012. This was slightly ahead of target at 4% (Base Rate + 3.5%). Investments making a significant contribution to DGF performance included: Listed Equities (equity markets were strong as the global growth outlook improved); High Yield Credit (benefitted from a continued search for yield in a low interest rate environment), Active Currency (selected overweight positions in emerging market currencies and a strengthening U.S. dollar helping to generate positive returns); and Emerging Market Bonds (supported by a combination of strong global growth and strengthening emerging market currencies along with progress on structural reforms and a stabilisation of commodity prices). Asset class weightings for the DGF portfolio were also outlined along with Baillie Gifford’s views that global growth expectations are rising, that monetary policy is likely to tighten, that several asset classes are at or above Baillie Gifford’s estimate of fair value; and that market volatility may create opportunities. In regard to stock selection, a Member suggested it more likely for stocks in India and China to grow rather than in Europe; he felt that developed markets were not growing so well and emerging market stocks were exciting.
Given the intention to pay more cash due to the Fund’s cash deficit position and to move investments away from DGF, a Member sought the representative’s thoughts for the future and how it might be possible to achieve the necessary returns without an excessive element of risk. As the Fund would be paying pensions into the next century the representative considered it necessary to continue with some global equities and also acknowledged the Sub-Committee’s proposal to replace DGF with assets providing a similar return for income. Baillie Gifford did not have a Multi-Asset Income Fund product.