Agenda item

Report FSD22035

The report provided a summary of the investment performance of Bromley’s Pension Fund in the 4th quarter of 2021/22. The report also contained information on general financial and membership trends of the Pension Fund and summarised information on early retirements.

John Arthur of MJ Hudson, the Council’s Investment Advisor, introduced his quarterly report for Q1, 2022. He confirmed that it had been a difficult quarter for the Fund – the Fund fell 6.88% in the quarter, underperforming its benchmark, although in the longer term returns remained above actuarial assumptions. The underperformance in the quarter was largely due to the Baillie Gifford fund, but this was more about the market than the fund manager.

Central banks had continued to believe into 2022 that inflation would be transitory, but Covid lockdowns in China further disrupting global supply chains, and the Russian invasion of Ukraine, were ensuring that inflation would continue to be a major challenge. Equities were a hedge against inflation, but not when the expectations around inflation changed. He thought that this amounted to a regime change in financial markets, with a period of uncertainty where it would be harder to predict and understand how markets would perform. Most of the major factors were likely to be negative or add costs, such as interest rate policy, the reverse of globalisation, the costs of de-carbonising the economy and demographics. Only technological innovation was likely to be positive – and this was an area that Baillie Gifford invested in. Inflation was likely to remain higher and more volatile than for decades. This would be accompanied by heightened unrest, possibly exacerbated by ongoing Russian aggression.

He concluded by stating that the Fund’s cash-flow situation had been stress-tested, and the Fund remained able to cover expected benefit payments from contributions and investment income. There was no need to sell assets to finance expected drawdowns for the International Property Fund. 

The Chairman reported that he was due to have a meeting with Baillie Gifford the following Monday – he would report back from this. £14.4m of Baillie Gifford equities had been sold to fund the Morgan Stanley investment. Mr Arthur referred to the lessons to be learnt from the sudden underperformance of the Baillie Gifford Global Equities Fund, which had fallen nearly 20% behind the index over the past year. The Committee had discussed moving money out of the Fund at the end of 2021, and he now regretted not pushing this more firmly at the time. However, long-term performance was still good and he did not expect Baillie Gifford to change their strategy. His feeling was that the Baillie Gifford fund had already taken most of its reductions. Members would look at their strategy in the asset allocation review due later in the year.

Members commented that, as an active Committee, they were willing to take difficult advice, and several Members commented that it was important not to have too many Fund Managers – the Chairman suggested that six was the maximum.

A Member commented that he was disappointed to hear that Schroders were holding so much cash and waiting for the opportunity to re-invest. He also expected MFS to have performed better, and questioned whether more money should be switched from Baillie Gifford to MFS in the current conditions.  Mr Arthur repeated that the differing investment approaches of Bailie Gifford, more growth orientated, and MFS taking less risk, offered a natural counterweight. This balance was now working.  It was suggested that as no fund managers were lined up to attend for the 19^th September meeting Bailie Gifford should be asked to attend then.

The Committee discussed whether cash was the best option with equities struggling. The Chairman asked Mr Arthur to keep an eye on Schroders and their cash holding, and questioned whether other Managers were taking a similar approach. 

Members also commented on the situation with Russia and China. The Baillie Gifford Fund had disinvested in these countries, but there was still some Russian holdings in Fixed Income portfolios which had become difficult to trade and had zero value.

RESOLVED that the contents of the report and information contained in related appendices be noted.