Agenda item

Details were provided of the Fund’s investment performance for the third quarter 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 December quarter at £963.7m (£1,045.5m at 30th September). Market conditions led to a significant negative performance for the Fund in Quarter 3 (echoed around the country) with year to date return at 7.94% against a 5.94% benchmark. Details of fund manager performance against benchmarks for the quarter, year to date, 1, 3 and 5 years, and since inception were appended to Report FSD19034. Medium and long-term returns remain particularly strong with the Fund ranking third against the 61 funds in the PIRC LGPS universe for the year to 31st March 2018 (first over three years, second over five years, first over ten years and second over 20 and 30 years).

To implement the revised asset allocation strategy agreed on 5th April 2017 all Diversified Growth Funds and Global Equity assets held by Blackrock would be sold. At 31^st January 2019, the Blackrock Global Equity Fund balance amounted to £10,953,304 and in line with the Sub-Committee’s resolution on 14 December 2017 (“the balance of the Blackrock sale, less £3m required to meet the cash-flow shortfall that had occurred during 2017/18, be invested in the Fixed Income Portfolio”), Members were asked to confirm that the balance of the Blackrock fund be invested in the Baillie Gifford Fixed Income portfolio.

Recommendation 2.1(b) of Report FSD19034 sought agreement to invest the balance of the Blackrock Global Equity Fund in Baillie Gifford’s Fixed Income Portfolio. However, it was suggested instead that the balance (£10,953,304) be transferred to the investment type suggested by Mr Arthur, providing a test case for the investment. Options could be looked at to invest the sum and Mr Arthur would meet Fidelity on 7^th March. The Chairman suggested keeping the sum in Blackrock equities to retain options and for a final decision on the balance to be delegated to himself and Director in consultation with Mr Arthur. Options for alternative fixed interest investments can come back to the Sub-Committee from Mr Arthur’s discussions with Fidelity. As such, Members agreed not to press ahead in selling the Blackrock global equities balance but to await the outcome of the review by MJ Hudson Allenbridge into alternative fixed interest options (for the Sub-Committee’s May meeting). Should something urgent come forward In the meantime it was agreed to delegate any decisions to the Chairman, Vice-Chairman, and Director (in consultation with Mr Arthur). 

Following WM Company (State Street) ceasing (from 2016) to provide performance measurement services to clients for whom they are not custodian, the Council’s main custodian, BNY Mellon, has provided performance measurement information with Pensions & Investment Research Consultants Ltd (PIRC) providing LA universe comparator data. The performance measurement contract with BNY Mellon expires in June 2019 and with no company offering performance measurement, or performance measurement and accounting without custody, approval was sought to agree an award of contract to BNY Mellon for a further three years at an estimated value of £30k per annum via an exemption to competitive tendering and subject to annual review.

Information on general financial and membership trends of the Pension Fund was also appended to Report FSD19034 including final outturn details for the 2017/18 Pension Fund Revenue Account, the third quarter position 2018/19, and fund membership numbers. A cash surplus for the Fund of around £3m is expected for the year. Following the merger of Bromley College and Greenwich Community College in 2016 and transfer of assets/liabilities to the Local Pensions Partnership, a final balancing transfer payment of £529k was made on 7th December 2018.

Summarised information on early retirements was also appended to Report FSD19034and additionally approval was sought on Fund Manager attendance at future Sub-Committee meetings. 

In discussion, Mr Arthur commented on investment performance for the Fund last quarter and outlined reasons for market volatility in the quarter which saw a major fall in markets. The Fund under-performed by more than 2% against the benchmark in the quarter, with Government Bonds the only positive area. The U.S. Federal Reserve raised interest rates with economic news of the slowdown. Equity markets bottomed out around 28^th December, following more cautious messages from the Fed. Risk assets have shown some recovery. Although Mr Arthur expected further volatility going forward, and for it to be potentially more severe, it remained necessary to take investment risk even though returns will be low. Mr Arthur suggested diversified assets to counter volatility. 

Mr Arthur highlighted three issues to account for the Fund’s underperformance last quarter. As covered in the MJ Hudson Allenbridge quarterly report these comprised:

·  the Fund entering the quarter overweight in equities against its Strategic Benchmark with a 65% exposure against the benchmark at 60% and correspondingly underweight in Bonds, Multi Asset Income, and Property;

·  the multi asset income portfolios having an absolute benchmark related to short term interest rates generating a positive return for each quarter even if markets fall; and

·  Baillie Gifford, managing most of the Fund’s global equities, underperforming in the quarter.

Asset allocation changes over the last nine months, including a 60% strategic benchmark for equities, had mitigated the effect. The former allocation to equities was reduced by firstly funding the departure of Bromley College purely with equities and then by allocating 20% of the Fund to Multi Asset income and 5% to UK property, both of which performed better than equities in the final quarter of the year and since inception last year. As the moves are reflected in the Strategic Benchmark, their benefit is not captured in the Fund’s relative performance against its benchmark. However, they have had a beneficial impact on the total value of the Fund and therefore the funding level when the next actuarial revaluation starts in March. The Chairman felt the approach is on the right track and the changes had mitigated the downturn. Parameters were also thought necessary which can be reviewed every two years or so on the basis that should the number of asset classes increase there is a deviation from the fixed strategic benchmark. However, it is best to see how the latest asset allocation changes proceed rather than have more formal changes. Suggesting the Fund would not want to be too overweight in equities, a Member questioned how much risk it is necessary to take and where funds should be placed, if not in equities.Mr Arthur indicated that while we do not want to be too overweight in equities, the fund has been balanced by the reductions. Mr Arthur suggested MAI and bonds and to transfer low and high risk into medium risk. The Director suggested a red flag in monitoring reports to highlight any investment class moving to an underweight or overweight position. A Member welcomed this for the Sub-Committee’s next meeting and would like to see any risk parameters that might be proposed. With more volatility, the Chairman thought it necessary to look at this area more regularly. An actuarial review will commence in March and the Asset Allocation Strategy could be reviewed once the outcome is known. 

A Member urged cautionabout any future sale of the Fund’s investments in equities. Long term equities are reliable and their benefit would be lost if underweight in the class. The position can be reviewed and monitored. Corporate Bonds and goldwere suggested. Gold would not yield a dividend, but could be usedas an asset. There should be no rush to sell (equities) and invest in Fixed Income – the outcome of the Actuarial Valuation should be awaited. Supporting this view, the Chairman highlighted that transitional costs would also be incurred with any change and he assured Members that no change would take place until after a review of the asset allocation strategy.

Predicting a volatile couple of years ahead, another Member referred to being at the end of a long economic cycle, reinforcing a need for active management. With a period of uncertainty it is necessary to be smarter. Currency could also unravel and reduce the Fund’s value and it might be necessary to have more diversification. The Chairman indicated that he would be more worried if the Fund had not achieved the level of growth it had. The Chairman supported looking wider and encouraged MJ Hudson Allenbridge to provide any further thoughts.

On Fidelity’s Fixed Income, Mr Arthur would discuss how to improve the low yield. Should interest rates rise, bonds are likely to fall in performance and Mr Arthur suggested corporate credit assets (multi-asset credit) as an example of a better way to generate returns. Mr Arthur will talk to Fidelity and bring further detail/proposals to the Sub-Committee’s May meeting.

Mr Arthur brought forward a proposal from Schroders.Mr Arthur advised that the Schroders Multi-Asset Income (MAI) Portfolio is currently U.S. Dollar funded and it is then hedged back to Sterling (Sterling – Dollar – Sterling). When sterling and dollar interest rates are similar this did not matter.But now it is not cost efficient, Schroders had offered a new sterling based fund which would be more efficient and provide a marginally better return. It would take a couple of months to establish and Mr Arthur felt it would be sensible for the Fund to take advantage of the offer. The BromleyFund would be the only holder of the units (probably making selling more complex). The Chairman favoured the product and Members supported the proposal. Another Member highlighted a real estate opportunity related to the lease of an Npower site in Solihull which expired in December 2018. The site comprises 75,000 sq.ft and Mr Arthur would investigate. 

RESOLVED that:

(1)  the contents of Report FSD19034 be noted;

(2)  sale of the Blackrock Global Equity Fund be deferred whilst awaiting the outcome of a review, by the Sub-Committee’s financial adviser, of alternative income products;

(3)  the further award of the Pension performance measurement contract via an exemption to competitive tendering (as set out at paragraph 3.3.3 of Report FSD19034) be agreed;

(4)  the programme of Fund Manager attendance (paragraph 3.7.1 of Report FSD19034) be agreed as follows -

·  15th May 2019 – MFS (global equities) - rescheduled

·  24th July 2019 – Fidelity (fixed income, multi-asset income and property)

·  27th August 2019 – Schroders (multi-asset income)

·  3rd December 2019 – Baillie Gifford (global equities and fixed income)

(5)  the proposal to switch the current Schroders dollar fund to a sterling fund, brought forward by the Sub-Committee’s financial adviser for the Schroders Multi-Asset Income Fund, be agreed.