Agenda item

Report FSD18042

Details were provided of the Fund’s investment performance for the fourth quarter 2017/18 with additional detail provided in an appended report from the Fund’s external advisers, AllenbridgeEpic. 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 March quarter at £970.7m and had increased to £983.6m as at 30^th April 2018.The total fund return for the fourth quarter was -2.39% against a benchmark of -2.62%, compared to an average -3.6% across the 61 LGPS funds in PIRC’s universe. Overall, medium and long-term returns for the Fund remained particularly strong with returns of 6.7% for 2017/18 and 26.8% for 2016/17 against a benchmark of 3.1% and 24.6% respectively.

Concerning the revised asset allocation strategy and appointments of Schroders (60%) and Fidelity (40%) to manage the Multi Asset Income (MAI) allocations and Fidelity to manage the property fund, initial drawdown for the Fidelity MAI and property fund was completed in February 2018 and the Schroders MAI investment was due to complete on 25^th May 2018.

A Q4 summary of manager performance was also appended to Report FSD18042 with the Council using its main custodian, BNY Mellon, for performance measurement information. PIRC currently provided LA universe comparator data with 61 of the 89 LGPS funds signed up to the service, including L B Bromley. Details of the final outturn for the 2016/17 Pension Fund Revenue Account were also appended to the report along with the provisional outturn for 2017/18.

A timetable of Fund Manager attendance at future meetings was also outlined as follows:

24^th July 2018 – MFS (global equities)

13^th September 2018 - Schroders (multi-asset income)

7^th November 2018 – Baillie Gifford (global equities and fixed income)

5^th February 2019 – MFS (global equities).

In discussion, Allenbridge summarised the Fund’s performance highlighting its very good long term performance and its position as one of the best performing LGPS funds. Background was also provided to the recent asset allocation review and decisions to place funds in the MAI and Property mandates.

Although the Fund’s value fell to £970.7m, an outperformance of 0.23% was achieved for the quarter even though global equity markets had been undermined in mid-February. With weak bond markets, strong economic growth, and rising inflation, particularly in the US, an expected rise in interest rates led to the US equity market falling 10% from peak to trough in the following two weeks. All major equity and bond markets were down for the quarter as a whole. 

Since Q4, the fund’s value had increased and markets were seeing an increased level of stability. Even so, with the substantial Q4 turbulence, Allenbridge suggested (in their report) that 2018 might not be as smooth as 2017. Members were advised that some instability could also remain as central banks continue to remove stimulus to economies such as Quantitative Easing. Nevertheless, Allenbridge suspected that conditions would be a little better at the end of 2018/19.

Allenbridge also provided a brief summary on the performance of individual fund managers with more detail provided in their report. Although the MFS Global Equity portfolio is ahead of benchmark over five years, it was not reaching its performance target and a close watch was being given to the portfolio.

Highlighting a positive message for the Fund overall, the Chairman indicated that it is more or less 100% funded. In subsequent discussion, various points and observations were made by Members with a number of questions asked. 

In regard to fixed Interest, confirmation was sought that this referred to Fixed Income bonds where the capital value was at risk. This was confirmed by Allenbridge. Additionally, it was noted there had been a conscious choice in some cases to invest in sub-investment grade bonds rather than AA rated instruments. Allenbridge indicated that this had been a choice to increase yield on the portfolio and there is a balance to be struck on wanting yield and not wanting risk. Although investments appeared well spread, the inclusion of bonds in relation to economies such as Ghana, South Africa and Egypt did present a greater risk profile. However, fixed interest products were necessary to increase yield for the Fund providing a yield/risk balance. For investment, a close watch was maintained on “junk bonds” thought near to becoming investment grade bonds. 

Reference was also made to geo-political considerations, not least Brexit which was posited as inhibiting UK returns, albeit that a view was emphasised of Brexit being an opportunity for growth. In addition, matters such as a new (and uncertain) Italian government, China’s high inflation rate, Middle East instability etc. were matters to note. A need for caution was suggested on MAI funds - should such headwinds come together there could be difficulties.

On property, the yield is attractive and being achieved (but with no excess return); property also increases diversification and spreads risk (helpful in a time of volatility). Investing in a fund rather than direct to property is preferable as risk is spread and income provided. 

Concerning the Fund’s cash deficit, the sum amounted to £2.3m in 2016/17 and £5.4m in 2017/18 and, prior to the recent asset allocation review, had been projected to increase to around £20m over the next five years. In this context, the Director of Finance highlighted a seminar on the Fund for all Members set for Monday 5^th November 2018 (including attendance by Fund Managers). For new Sub-Committee Members, previous papers of interest would also be circulated for information e.g. those related to the London Collective Investment Vehicle (CIV), the recent asset allocation review, and the Fund’s previous actuarial valuation. 

Concerning recent global developments (such as US relations with Iran and a more protectionist US approach to trade), markets can normally cope with political events but major political decisions leading to developments such as a serious trade war can impact economies and lead to higher inflation, interest rate rises, and a slump (in the global) economy. 

Should income from the new MAI and Property funds ever be insufficient to meet cash-flow requirements, Members supported the Director (in consultation with the Chairman) instructing Global Equities managers to pay dividend income to the Fund to meet additional cash-flow needs e.g. in the event of a small bulk transfer out of the Fund. Any larger cash-flow need which dividend income alone could not meet would be submitted to the Sub-Committee for agreement on assets to sell for the payment.

On the “shadow pension fund” (Parallel Fund) (value at approximately £2.8m) previously established to mitigate the impact of future actuarial valuations on the Council’s General Fund, the Chairman suggested a discussion on whether the fund should be reviewed and the Director suggested the matter be reviewed by the Executive at the time of the Fund’s next triennial valuation. 

RESOLVED that:

(1)  the contents of Report FSD18042 be noted; and

(2)  authority to retain dividend income from Global Equities mandates to meet any additional cash flow requirements be delegated to the Director of Finance in consultation with the Chairman of the Sub-Committee as detailed at paragraph 5.1.3 of Report FSD18042.