Agenda item

Report FSD18018

Details were provided of the Fund’s investment performance for the third quarter of 2017/18. Additional detail was provided in an appended report from the Fund’s external advisers, AllenbridgeEpic and Baillie Gifford provided commentary on its performance and economic outlook (recent developments in financial markets, their impact on the Fund and future outlook). 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 December quarter at £998.0m and had risen further to £1,010.9m at 31st January 2018. The third quarter total fund return was 4.4% against a benchmark of 3.9%. This compared to a 4.0% average across the 60 LGPS funds in the PIRC universe.

Concerning the Markets in Financial Instruments Directive II (MiFID II) which came into force on 3rd January 2018, the Fund’s status as elective professional (with all relevant counterparties, including advisers and custodian) would be kept under regular review with counterparties added or removed as necessary for the Fund’s investment needs.

With the Council’s ongoing commissioning programme, British Telecommunications plc and Greenwich Leisure Limited became admission body employers within the Fund from 1st November 2017. This followed transfer of the remaining ISD Service and contract award for library services. Two academies had also changed cleaning contractors from 1st January 2018 and officers were liaising with contractors on an exit valuation for the outgoing admission body and with the successor contractor in obtaining admitted body status within the L B Bromley Fund.

The following Fund Manager attendance was also proposed for future Sub-Committee meetings:

·  22nd May 2018 – MFS (global equities)

·  24th July 2018 – Fidelity (fixed income, multi-asset income and property)

·  7th November 2018 – Schroders (multi-asset income)

·  5th March 2019 – Baillie Gifford (global equities and fixed income)

·  23rd May 2019 – MFS (global equities).

Client Service Directors from Baillie Gifford attended for the item – Kenneth Barker, John Carnegie, and Paul Roberts. In view of Kenneth Barker’s impending retirement, John Carnegie was introduced as Baillie Gifford’s partner representative for the L B Bromley Fund with Paul Roberts introduced as a Baillie Gifford specialist on Fixed Income. 

The value of Baillie Gifford’s Portfolio for the Fund (Global Alpha, Fixed Income, and Diversified Growth) stood at £492,837,299 at 31^st December 2017 with Global Alpha at £383,618,920, Fixed Income at £57,818,417 and Diversified Growth at £51,399,962.

A number of questions were asked about Baillie Gifford’s Global Alpha and Fixed Income performance and discussion included the positive effect of currency and foreign exchange benefits for the portfolio. On Fixed Interest (and upon request), Mr Barker offered a view that it might be preferential to invest in corporate bonds rather than gilts.

Along with good long term performance, it was a strong year for global equities with high end tech companies performing particularly well. Exceptional performance had been achieved over the past few years alongside benefits from falling sterling. Baillie Gifford looked to invest over a five-year period and they expected Global Equities to return well over the next five years. 

On governance, Baillie Gifford indicated they would be prepared to veto (vote against) Directors receiving high remuneration packages for poor company performance. However, rather than vote against a package, Baillie Gifford would also want to say why a remuneration level might be wrong and warn that a similar voting outcome could lead to Baillie Gifford selling shares in the company. Baillie Gifford offered to come back with further detail and check for any votes against (such packages) when shares in a company had been sold. 

The Chairman thanked Ken Barker for his contributions over the years and wished him well for retirement. In turn, Mr Barker praised L B Bromley, highlighting that Members and officers are engaged, with the Fund fully funded. The Chairman also welcomed John Carnegie and Paul Roberts to the L B Bromley Fund.

Baillie Gifford representatives left the room. Mr Arthur highlighted the Fund’s good third quarter performance and strong markets. In fixed interest, returns are low but managers had achieved a good performance against benchmarks. The Fund is doing well as are the Managers. 

Globally, Mr Arthur felt the U.S. economy is now “alight” although a rise in U.S. interest rates is just beginning to dampen the U.S. economy. There is a concern on over dampening and therefore a slight wobble in markets.

There is a small flame in the Japan economy and the Europe economy is alight.  The UK economy is being dampened slightly through a level of uncertainty. Mr Arthur expected equities to hold their own at the present time.

A lot of Quantitative Easing (QE) had taken place to ignite economies but this had mainly occurred in developed markets. In Brazil, interest rates fell as the economy fell. Mr Arthur considered Baillie Gifford a good Fund Manager although last year was near the top of their achievement with strong performance in technology; however, something was bound to come along to upset this and Baillie Gifford’s technology exposure was something to monitor. Mr Arthur thought equities would continue to rise although there was now a slightly greater level of uncertainty. A Member highlighted that last year saw the biggest ever investment to the UK regardless of Brexit. 

A further Member highlighted Venezuela’s serious economic difficulties and any knock-on effect for world markets. Mr Arthur thought that Venezuela’s collapsing (imploding) economy is well flagged and would be surprised if Managers had exposure in the country. 

RESOLVED that:

(1)  the contents of Report FSD18018 be noted; and

(2)  the proposed timetable of fund manager attendance, set out at paragraph 3.8.1 of Report FSD18018, be agreed.