Printed copies of reports from certain Fund Managers are circulated to Sub-Committee Members with this agenda. Remaining reports will be circulated as soon as possible.

Representatives of Baillie Gifford are expected to attend the meeting for this item.

Baillie Gifford presented their investment report covering management of the company’s Global Equities and Fixed Income portfolios for the Fund. At

31^st December 2018 the total value of both portfolios stood at £426,457,260 which had since risen to some £460m by 28^th February 2019.

Baillie Gifford’s Global Equity portfolio under-performed against benchmark in the past 12 months (a volatile period) but over three years, five years, and since inception it has outperformed the benchmark. Stock is selected for the long-term with Baillie Gifford looking at the fundamentals of companies when selecting. A period of volatility provides a particular opportunity for this approach long term and stocks in Naspers, Prudential and Ryanair were provided as examples. Baillie Gifford often look at companies where conviction is high but their share price has dropped.

To 31^st December 2018, Fixed Income under-performed against benchmark over periods of five and three years and 12 months (the latter showing the greatest difference against benchmark). Against falling Fixed Income yields solid returns had been provided but recent periods were more challenging. Relative returns have also been impacted by emerging market holdings. However, over the long term there has been a positive selection in corporate bonds. Currently, the Fixed Income is allocated neutrally (50%/50%) between Gilts (government bonds) and corporate bonds. 

Although Baillie Gifford’s portfolio performance was volatile there is evidence the market isrecovering and its value rose in early 2019. The long term benefit (of Baillie Gifford’s approach) had proved successful for the Fund. The Chairman considered Baillie Gifford a good example of active management and the Director of Finance indicated that £95m has been returned for the Fund through (Baillie Gifford’s) active management.

On active managers being able to perform well during future volatility and recession, stock market returns are driven by big winners with rapid growth. Baillie Gifford also invests in stable companies such as Prudential. On global factors e.g. China (US/China trade war, slowing economy, reduced GDP etc), Japan adopting a “Japan First” approach, and considerations related to India, Baillie Gifford looked at fundamentals. China is urbanising, the number of patents has doubled, and there is growth in Artificial Intelligence (AI). China’s economy (2^nd largest market), remains structurally strong and it was thought they will become the largest economy at a future point; Baillie Gifford will look at China more in 2019 and plan toopen a Shanghai office.

Concerning reliance on algorithms (with no real understanding of sentiment), Bailie Gifford saw an important human judgement aspect to what they are doing. It is also necessary to consider governance matters. Baillie Gifford management teams use intuition. However, Baillie Gifford is not complacent and use AI for assistance. On concerns about cyber hacking (e.g. of foreign governments and possibly world markets), this is tracked for companies in which they invest. Concerning any Chinese state interference in the stock of Chinese companies, Baillie Gifford understood the risk but there can be market opportunities if a Chinese company is supported by their state. 

On the Fixed Income under-performance, Baillie Gifford had difficulties concerning overseas emerging market governmentbonds. It was particularly recent performance where Baillie Gifford had struggled and steps had been taken to remedy the position (an individual with macro experience had been recruited as well as someone for active decisions). Baillie Gifford suggested it will take about two to three years to see a change in performance.

When asked about future investment for the L B Bromley Fund, Baillie Gifford considered that equities provide the best returns (long- term), ten-years providing a best indicator of yield. Over shorter time, there are benefits in diversification if interest rates stay low. Baillie Gifford has a range of Fixed Income Bonds; reference was made to looking at Corporate Bonds that outperform the market.

Mr Arthur understood the Baillie Gifford’s Fixed Income Fund underperformance, but this provides an appropriate balance. Baillie Gifford had other ways to help with Fixed Income and the Chairman encouraged Baillie Gifford to come back with their thoughts. The Chairman referred to the sound relationship Bromley’s Fund has with Baillie Gifford and he offered his thanks and appreciation to Baillie Gifford for what they are doing for the Fund. Baillie Gifford also highlighted their Investment and Training seminar for LGPS funds from 9^th to 10^th October 2019 in Edinburgh.