Printed copies of Fund Manager Reports will be circulated to Sub-Committee Members upon the Sub-Committee being re-constituted and Members of the Sub-Committee being appointed.
Representatives of Fidelity 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 (for information) prior to the meeting.
Representatives from Fidelity attended the meeting to report on the performance of its mandate in Fixed Income (UK Aggregate Bond) Multi-Asset Income (Diversified Income) and Property (UK Real Estate).
Diversified Income
Fidelity’s Diversified Income portfolio for the Fund was launched on 21st February 2018 with an initial mandate size of £80m and a target income of 4% (with no benchmark). A flexible investment approach is taken to navigate changing market environments, balancing income and total return with risk and liquidity.
Income for the portfolio is earned from Growth assets (Equity, Infrastructure, Real Estate, and Catastrophe Bonds), Income assets (Government Bonds, Investment Grade Bonds, Hard Currency EM Debt, Mortgages/ABS, and Cash), and Hybrid assets (Local Currency EM Debt, Loans/CLOs, Hybrid Bonds and High Yield Bonds).
Income assets aimed to deliver steady income with capital preservation characteristics, tending to perform better in recessionary phases when GDP growth is subdued and inflation falling. Hybrid assets deliver an attractive yield with potential for capital growth, tending to outperform in early recovery periods. Growth assets are the most volatile, aiming to deliver capital growth with income, and tending to perform better in phases of robust economic expansion and rising inflation. Investment ranges for the asset groups comprised: Income assets 20-80%; Hybrid assets 0-55%; and Growth assets 5-40%. As at 31st March 2018, Diversified Income comprised: Income assets (yield 2.8%) at 35.5%; Hybrid assets (yield 5.6%) at 32.8%; and Growth assets (yield 4.3%) at 31.7%. Mr Arthur indicated that the Fund could afford to increase diversification at the expense of a reduction in overall returns in view of its good level of funding (approximately 100%).
For standard period returns to 31st March 2018, Diversified Income achieved a one month return of -1.2% and achieved a return since launch of -1.0%. A strong period of economic growth is now plateauing with markets becoming more volatile. As such, Fidelity is looking to have more defensive instruments for the portfolio and low volatility assets. These include instruments such as hedges to dampen volatility and more fixed Income assets going forward. The portfolio was built to withstand a challenging environment and is well diversified across asset classes, regions and capital structure. Fidelity also favoured Alternatives where good yield and diversification opportunities can be found. Emerging market local currency debt, loans and financials are high conviction areas.
Fidelity had increased equity market hedges for the portfolio since the end of March by adding to hedges in the UK equity market and technology sector. They had also trimmed exposure to European high yield bonds and added to US investment grade bond exposure. Additionally, Fidelity had taken a new holding – Chenavari Toro Income Fund Ltd. Fidelity expected to become defensive on equity allocations at an appropriate point in the future.
UK Real Estate
An expected income distribution of 4.5 to 5.0% p.a. was forecast over the next five years for Fidelity’s UK Real Estate portfolio. The fund had an Asset GAV at 31st March 2018 (including undrawn commitments and cash) of £597.8m covering 45 high quality assets in the Office sector (46%), Logistics/industrial sector (38%), and Retail sector (18%).
UK Aggregate Bond
Fidelity’s presentation showed that since inception, performance against benchmark for their Institutional UK Aggregate Bond fund amounted to 1.3% p.a.
At the end of their presentation Fidelity representatives left the meeting.
The Chairman then took the opportunity of thanking Mr Alick Stevenson (Allenbridge) on his work for the Pension Fund as investment adviser over a number of years. Mr Stevenson would be taking retirement and future investment advice from Allenbridge would be provided by Mr John Arthur.
Mr Stevenson and Mr Arthur both left the meeting on conclusion of the Sub-Committee’s Part 1 business.