Agenda item

Report FSD20029

At the Sub-Committee’s previous meeting it was agreed that more information on options for investing in international property should be sought from Fidelity and Mercers for the remaining 5% of the fund that was unallocated. Although Mercer had provided a briefing which had been circulated, Fidelity were not able to assist. John Arthur had therefore arranged for an external fund manager, Christoph Butz of Franklin Templeton Investments, to attend the meeting.

Mr Butz distributed a brochure summarising his presentation. He began by emphasising that with property there was a low correlation to traditional assets, and pricing was very varied and specific, with no two assets the same. This led to opportunities particularly for capital appreciation, even in adverse markets. With local real estate markets moving independently there was also natural diversification.  There was a balance of risk to return, from core assets, to core plus, value added and opportunistic. Typically, core plus or value added assets might have one or more problems – it was important to identify the problems that could be overcome. A pipeline of assets needed to be established, buying property from owners who were not able or willing to invest. By identifying property where the quality and quantity of cash-flow could be improved it was possible to reduce exposure to market forces.

Mr Butz answered questions from the Sub-Committee. He commented that there was no clear and substantial difference between core plus and value-added assets, and Franklin Templeton targeted both. He described the process of selecting assets in some detail - typically, about 600 transactions might be considered initially, but only 10-15 would be carried through. It was important to focus on value, carry out due diligence and avoid assets that you did not understand. Franklin Templeton used an active risk management tool through the entire investment process. There was no pre-set fund limit, and investment was typically over a ten year period. The strategy had to be flexible enough to exploit a range of opportunities. It was based on buying assets where the purchase price could be improved on by 20-30% before the asset was recycled. In response to further questions, Mr Butz stated that while the macro position was important, much of the focus had to be on bottom-up consideration of individual assets that could be improved. Strategy had to be more than doing what worked in the past.

The chairman thanked Mr Butz for his very clear and helpful presentation.

When Mr Butz had left the meeting Members continued to discuss what approach the Council should take. Members considered that it was important to see a range of potential fund managers – this procurement had to be based on finding the right team which was both stable and dynamic, and with global resources and expertise. It could not be decided just on numbers. 

John Arthur left the meeting while the Sub-Committee briefly moved into part 2 to discuss the procurement route.

RESOLVED that

(1) The report and the presentation from Franklin Templeton be noted.

(2)  Final changes to the asset allocation strategy be agreed.

(3) Procurement of an investment manager for international property be conducted by MJ Hudson Allenbridge.