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 will be attending the meeting for this item.
Minutes:
Mr John Carnegie and Mr Paul Roberts, representatives from Baillie Gifford attended the meeting.
Mr Carnegie explained to the Sub-Committee that it had been an exciting year in the stock market and the bond market. 2019 marked the 20th Anniversary of Baillie Gifford’s relationship with the London Borough of Bromley and it was a relationship for which Baillie Gifford were hugely grateful. In response, the Chairman recorded the Sub-Committee’s thanks to Baillie Gifford for the performance that had been delivered and the work that had been done in respect of the Bromley Pension Fund. The Director of Finance reported that Baillie Gifford’s outperformance had delivered over £100m extra into the Pension Fund over the past 20 years, compared with the performance of passive funds.
An overview of the Baillie Gifford portfolio was circulated to the Committee and Mr Carnegie confirmed that the company managed two mandates on behalf of the Pension Fund – global alpha (global equities) and fixed aggregate
Global Alpha
The perspective taken by Baillie Gifford was one of megatrends rather than headlines with a research agenda which promoted long-term thinking. Over the past 12 months fund investment returns had increased by over 15% against a benchmark of an increase of 11%. Mr Carnegie explained that recent stock purchases had included companies involved medical equipment (such as Abiomed, Illumina, and Novocure), as well as established companies in emerging markets (such as Prudential, Reliance and Alibaba), and those involved in technological innovation (such as Axon and Microsoft). Members noted that whilst the personal IT market had experienced a period of boom in the last 10 years, the industrial market had lagged behind. Consequently, Baillie Gifford predicted a big shift towards industrial applications over the next decade or longer.
In response to a question concerning whether Baillie Gifford would retain its holding in M&G following the requisition of a holding in Prudential, Mr Carnegie explained that in general a view was not taken immediately and that M&G was a smaller part of Prudential. The position was under review and consideration would be given to the best course of action.
Fixed Income
In relation to fixed income Mr Roberts explained that Baillie Gifford aspired to improve performance in this area. Bond yields had fallen as markets had been suppressed, although a limited rise in yields was expected. It was noted that positive news on the position in relation to Brexit would help the Bank of England to raise interest rates. There was investment in selective currency markets (such as Norway).
In response to a question from the Chairman, Mr Roberts explained that the expectation was that yields would be moderately higher with a gradual rise to what was described as “semi-normal levels” over the next 3 to 10 years. In relation to the weighting of fixed income investment, Mr Roberts explained that three to four years ago the weightings had been reviewed in order to increase the yield of the portfolio.
A Member queried whether oversees government bonds were hedged back to sterling, noting that if unhedged the Council’s Pension Fund may be exposed. In response Mr Roberts confirmed that the Thai bonds were hedged however as the Norwegian bonds were linked to the EU market they were not hedged.
A Member noted that it would be helpful for the Sub-Committee to be provided with a more detailed breakdown of the elements of fixed income investments to enable members to further drill down, especially in relation to investment grade. Mr Roberts noted that under separate cover Members had been provided with the performance of indices. Broadly speaking, value had been added in corporate bonds however rates and currencies had fallen behind. Noting that no volatility data had been provided, another Member suggested that this would be useful information for Members of the Sub-Committee.
In response to a series of questions concerning the predicted global growth of the middle class, Mr Carnegie confirmed that Baillie Gifford did not make economic forecasts, instead the approach was to reduce exposure to stocks that had been high in price for a prolonged period or had disproportionately increased in price. In the event of an economic downturn Baillie Gifford would also seek to place more money in funds that were predicted to more readily recover. In relation to a question about the effects of climate change on the portfolio, Mr Carnegie highlighted that insurance companies within the life and health market were less likely to be affected by the impact of changing weather patterns. When considering suitable investments for the portfolio there was a question concerning sustainability and the threat of climate change was taken very seriously by Baillie Gifford. The Chairman also confirmed that the Sub-Committee had sought assurance about the work that had been undertaken in respect of climate change.
In relation to the performance of fixed income investments, Mr Roberts confirmed that since inception performance had been positive. Baillie Gifford had concentrated its efforts on the government side of the portfolio. Lessons had been learnt and improvements had been made.
The Sub-Committee noted that there were significant opportunities in the China market making it one of the most exciting places to invest. Accordingly, Baillie Gifford had recently opened a research office in China.
The Sub-Committee also noted that the fixed income element of the Baillie Gifford portfolio was there for diversification. There was a clear role for this fixed income element if equities were to struggle.
The Chairman thanked Mr Carnegie and Mr Roberts for attending the meeting, noting the Sub-Committee’s anticipation of the continuing strong performance of the investment.