Report FSD19060

The market value of the Fund ended the March quarter at £1,039.2m (£963.7m at 31^st December). A detailed report from MJ Hudson Allenbridge on fund manager performance for the quarter was appended to Report FSD19060 as was historic data on the Fund’s value.

With market conditions positive in Q4, particularly for equities, the total Bromley fund return was +8.68% against a +6.60% benchmark exceeding the Q3 fall. Nevertheless, the Fund’s annual return of +7.99% was slightly below the +8.27% benchmark. Details of individual fund manager performance against their benchmarks for the quarter, year to date, 1, 3 and 5 years and since inception were also appended to Report FSD19060.

The Fund’s medium and long-term returns have remained very strong overall underlining a consistently strong Fund performance over a long period. In addition to winning the LGPS Investment Performance of the Year in 2017, the LGPS Fund of the Year (assets under £2.5bn) in 2018, L B Bromley also recently won the Pensions, Treasury and Asset Management Award at CIPFA’s Public Finance Awards 2019.

Concerning a previous recommendation to invest the balance of the Blackrock Global Equities fund in a Fixed Income fund following implementation of the revised Asset Allocation Strategy (less a sum to meet the cash shortfall during 2017/18), a Multi-Asset Credit fund was subsequently suggested as an alternative to Fixed Income. MJ Hudson Allenbridge was asked to provide further details and their report on the matter was also appended to Report FSD19060.

With a £2.1m cash surplus generated during 2018/19 (excluding reinvested income), a reduced sum of £1.8m is now required to meet the Fund’s cash deficit at 31^st March 2019, leaving a sum of around £9.6m to be invested in a new fund (see below). A further appendix to Report FSD19060 outlined detailsof early retirements.

On admission agreements for outsourced services, Mytime Active ceased as an admission body on 31st March 2019 with four active members remaining in the scheme. The cessation debt and deficit repayment plan are being finalised for agreement by the Director of Finance, in consultation with the Chairman and Chairman of the General Purposes & Licensing Committee under delegated authority from that Committee. Additionally, the actuaries are considering a transfer payment for GS Plus and the Sub-Committee would be updated in due course.

Future Fund Manager attendance at Sub-Committee meetings, was scheduled as follows:

·  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)

·  3rd January 2020 – MFS (global equities)

·  13th February 2020 – Fidelity (fixed income, multi-asset income and property).

Final outturn details for the 2017/18 Pension Fund Revenue Account and the provisional outturn for 2018/19 were also appended to Report FSD19060 along with Fund membership numbers.

Mr Arthur provided a brief commentary on global economic and market conditions for Q4 2018/19 drawing comparison to how market conditions were much less favourable in Q3. Markets turned around rapidly in Q4 as the Fed changed its view on continuing to raise interest rates and removed the threat of further rises. As such, with a change in central bank policy, all asset classes showed a positive return. US-China trade tensions also looked set to be potentially resolved and major central banks titled towards a more accommodative stance and back to stimulating the economy.

Performance of the L B Bromley Fund has been strong long term against its Strategic Benchmark and in absolute terms. Over 5 years the Fund has returned 11.6% per annum and over 15 years, 8.9% per annum. Mr Arthur is not unhappy with Bromley’s Fund Managers but anticipating continued market volatility with more quarters similar to the last few, and an expectation of lower returns, Mr Arthur provided some recommendations for adjusting allocations. 

Given Mr Arthur’s current 2-5 year market outlook, and being uncomfortable with the Fund’s overweight position against its Strategic Benchmark in equities (Mr Arthur also felt that equity had over-performed), he asked the Sub-Committee to consider selling the 1.1% of the Fund currently held in Blackrock’s Enhanced Alpha Global Equity Fund so reducing equity exposure from 63.4% to 62.3% and lowering the overweight position in equities from +3.4% to +2.3% against the Strategic Benchmark. As the Fund is currently 1.3% underweight in its Multi Asset Income (MAI) mandates, Mr Arthur suggested the Blackrock funding be reinvested in the Fidelity MAI Fund.

Mr Arthur also favoured a further reduction in equities to the Strategic Benchmark level of 60% requiring a sale of some of the Baillie Gifford equity or the MFS equity. Mr Arthur’s preference was for Baillie Gifford as their equity portfolio accounts for over 40% of the Fund and is one of the main determinants of the Fund’s future performance against Benchmark. If reducing equity to 60%, Mr Arthur recommended reinvesting the extra (some 2%) in Fidelity’s Multi Asset Credit Fund (currently yielding 6% return and targeting a 5% return across a full market cycle rather than targeting a benchmark) along with 2% from Fidelity’s Fixed Income mandate, leaving the Fund with 10% in the existing two bond mandates (Fidelity Fixed Income and Baillie Gifford Fixed Income) and 4% in Fidelity’s Multi Asset Credit Fund (as an Absolute Return Bond Fund). This could be seen as the first step in moving all of Fidelity’s current mandate across to their Absolute Return mandate in due course.Mr Arthur expected the Fund’s two Fixed Interest mandates to deliver low returns, potentially no more than the current yield of around 2% per annum.

The Chairman had visited Fidelity offices in January about the Multi Asset Credit Fund and a presentation on the product would be given at a future meeting. Mr Arthur preferred more multi-asset income, being currently sceptical of other asset classes (in view of anticipated market volatility).

The Vice-Chairman supported a re-balance of fixed interest and if risk is not needed another Member preferred its removal foreseeing both volatility and a future recession. With a 2% fixed interest return he asked whether something active might be worthwhile or considering a Manager who might achieve better returns. He was less convinced on absolute return funds and not keen to take multi-asset credit forward at this point preferring to first see more evidence of bond fund performance. He was however supportive of money in Blackrock’s Equity Fund going to Fidelity’s MAI Fund.

Mr Arthur was not so inclined towards passive bond funds and would push against the Fund having a passive bond manager. Fidelity’s Fixed Interest is a conservative mandate which achieves through duration – this magnifies interest rate moves. Bonds are inclined to provide either interest payments or they go wrong. The Finance Director indicated benefit in considering the Multi-Asset Credit Fund at a later meeting and Mr Arthur would circulate facts for the meeting.

Members supported moving funds from Blackrock’s equity mandate to Fidelity’s MAI Fund. The Chairman also highlighted that the Fund’s actuarial review (triennial review) was taking place. Practically, (a larger) rebalancing of Fund assets would take place next year in response to the review; nevertheless, the Sub-Committee would look at Fidelity’s Multi-Asset Credit in July. Concluding debate on the matter, the Chairman summarised the Sub-Committee’s views as:

·  move money from Blackrock’s equity fund to Fidelity’s MAI Fund;

·  consider Fidelity’s Multi Asset Credit Fund at the Sub-Committee’s July meeting; and 

·  undertake any (larger) asset allocation shift next year (following outcomes from the triennial actuarial review).

Concerning Schroders Multi-Asset Income Fund the and their proposal to switch the current dollar based fund for L B Bromley to a sterling fund (agreed at the Sub-Committee’s previous meeting), the Chairman indicated that a delay was being encountered with the new fund and Mr Arthur was having further discussions with Schroders. The MAI Fund would switch to the new sterling Fund when conditions are met. 

(Democratic Services Note: as Members were content earlier in the meeting to re-order the agenda, this item was taken towards the end of the meeting. As the time was approaching 10pm, a vote was taken at the Chairman’s initiative on whether to adjourn or continue the meeting. Upon a vote Members agreed to continue the meeting and conclude the Sub-Committee’s business.)

Concerning a £12.193m surplus in the Pension Fund Revenue Account, surplus cash not needed to pay pensions would be invested. Auto-enrolment and permanent recruitment of social workers also contributed to increased employee numbers in the Bromley Scheme (from 6,198 at 31^st March 2018 to 6,316 at 31^st March 2019).

RESOLVED that:

(1)  the report be noted including MJ Hudson Allenbridge’s report at Appendix 6 to Report FSD19060 concerning the review of Fixed Income;

(2)  funds currently held in Blackrock’s Enhanced Alpha Global Equity Fund be sold and transferred to L B Bromley’s Pension Fund holding in Fidelity’s Multi-Asset Income (MAI) Fund; and

(3)  Fidelity’s Multi Asset Credit Fund product be considered in further detail at a future meeting.