Agenda item

Report FSD18086

Details were provided of the Fund’s investment performance for the second quarter of 2018/19. Additional detail was provided in an appended report from the Fund’s external advisers, MJ Hudson Allenbridge.

The market value of the Fund ended the September quarter at £1,045.5m (£1,017.9m at 30^th June). The quarter total fund return was +2.84% against the benchmark of +3.36%. Detail on performance by individual fund managers was appended to Report FSD18086. 

The Fund’s medium and long-term returns remain very strong overall - the Fund ranking third in the PIRC LGPS universe for the year to 31^st March 2018, first over three years, second over five years, first over ten years and second over 20 and 30 years. In addition to winning the LGPS Investment Performance of the Year in 2017, the Fund has also recently won the LGPS Fund of the Year (assets under £2.5bn) in 2018, recognising the consistent high performance of the Fund.

Information on general financial and membership trends of the Pension Fund

was also outlined along with summarised information on early retirements. Final outturn details for the 2017/18 Pension Fund Revenue Account were included as was the second quarter position for 2018/19 and fund membership numbers. A cash surplus for the Fund of around £3m is expected for the year.

For the Sub-Committee’s meeting on 5^th March 2019, it was proposed to invite Baillie Gifford (global equities and fixed income) with MFS invited to the Sub-Committee’s following meeting (currently set for 23^rd May 2019).

John Arthur (M J Hudson Allenbridge) commented on the Fund’s performance for the quarter. Reference was made to the Fund’s increased value although underperformance from Baillie Gifford’s Global Equity portfolio (accounting for over 40% of the Fund’s assets) returned at 3.4% over the quarter leading to the Fund underperforming its benchmark by 0.5%. The quarter had not favoured Baillie Gifford’s approach to investment growth and they had now underperformed over a couple of quarters. In view of the economic/market outlook, Baillie Gifford could be expected to struggle a little in future (but long term the portfolio had performed very well and continued to hit its long term performance target).

Conversely, MFS outperformed during the quarter on the Fund’s other Global Equity portfolio and MFS were now more stable following a period of poor performance (MFS invests in a different manner to Baillie Gifford and was selected because of this diversification of investment philosophy and approach).    

On economic outlook, a period of falling growth and rising inflation will be difficult for equities and fixed rate bonds. Events can happen to take the economy into different phases (e.g. Stagflation, Reflation, Deflation, increased productivity) causing uncertainty. In the U.S. The President tended to act specifically for the U.S. and economic growth. Mr Arthur was optimistic of having economic growth; however, recession was further away but when it occurs it could be more extreme.

The Fixed Interest portfolios and their value were discussed. Fixed interest provided diversification and returns will rise in a deflationary cycle when returns from equities reduce. Mr Arthur referred to removing some duration from fixed interest and explained how Fidelity can achieve a higher yield in such a difficult market (involving the purchase of Government debt). Provided a procurement process is not necessary, this was worth exploring, and a meeting could be arranged with Fidelity. Fidelity can then bring a proposal to the Sub-Committee’s meeting on 5^th March 2019. The Chairman questioned the value of the current Fixed Interest allocation and if Mr Arthur’s approach looked possible, he suggested Members consider any better mandate. Although from an actuarial perspective it might not be appropriate to take too much from Fixed Interest, it would be a good area to look at given the market volatility. Supporting the approach, another Member asked to see information on U.S. default rates and securitised debt. It was highlighted that some 6.4% of Schroder’s Alternatives portfolio is allocated to Securitised Debt and Mr Arthur indicated that (U.S.) default rates are particularly low. 

A Member wanted to see theinvestment income that is paid to the Council from MAI andproperty funds to see how the return is spent. The Director advised that a memorandum summary can be produced in future with the quarterly Fund performance report (ACTION: Director of Finance).

Concerning Baillie Gifford’s under-performance, Mr Arthur did not expect the portfolio to fall much further and commented on theexceptional run of good performance (over recent years). Noting that Fixed Income is in line with benchmark, a Member suggested that passive is also looked at if Fixed Interest is reviewed. Mr Arthur indicated that he would not naturally put forward a passive rate in Fixed Interest.

RESOLVED that the contents of Report FSD18086 be noted.