Minutes:
The Committee received a presentation from Fidelity International representatives, Ian Fishwick, Portfolio Manager – Fixed Income and David Barber, Relationship Director – UK Institutional providing an investment update on the London Borough of Bromley Pension Fund.
As at the end of March 2023, the London Borough of Bromley Pension Fund had approximately £142M invested in two of Fidelity International’s fixed income funds comprising the Sustainable UK Advocate Bond Fund and the Sterling Corporate Bond Fund. The Pension Fund also had £124.3M and £65M invested in Fidelity’s multi-asset Diversified Income Fund and the UK Real Estate Fund respectively. Performance in the two Fixed Income funds had been reasonably successful over the past year compared with the benchmark and performance of the Diversified Income Fund had improved during Quarters 3 and 4 and was now achieving a return of around 5% growth per annum. The challenging economic climate had impacted performance of the UK Real Estate Fund during the 2022/23 financial year; however, the fund was now recovering and had outgrown its benchmark by 1% in the 12 months to the end of March 2023.
The Chairman asked the representatives of Fidelity International for their views on a potential UK recession. The Portfolio Manager – Fixed Income stated that in his view it was likely the United States of America would experience a period of recession in the short- to medium-term, in which case the UK would be affected and may also go into recession. The current economic focus of the UK was on reducing inflation and the associated cost of living via increased interest rates and this made a recession more likely. The Chairman also asked about confidence in property values in relation to the Pension Fund’s investment in the UK Real Estate Fund and the Relationship Director – UK Institutional advised that whilst property values had undergone a revaluation over the past year, there was now increasing activity in this area.
A Member highlighted the difficulties in finding an appropriate benchmark for multi-asset funds which aimed to balance investments across different asset classes and queried whether a greater focus should be placed on fixed income funds now that returns were increasing. The Director of Finance further underlined the need for the case to be made for diversified investment over fixed income, particularly as these products tended to carry a higher risk, and the Relationship Director – UK Institutional confirmed that the yield from the Diversified Income Fund was increasing. On a related note, a Member was concerned at a potential increase in loan defaults due to rising interest rates and the Portfolio Manager – Fixed Income noted that an increase in defaults was anticipated for which banks were well-prepared, but there was concern that quantitative tightening would create some volatility in the market. In summing up, the Chairman suggested that whilst there were challenges inherent to investing in equity and bonds, this option also offered flexibility and therefore represented a valuable asset to the Pension Fund.
A Member queried the proportion of derivatives within Fidelity’s fixed interest funds to which the Portfolio Manager – Fixed Income responded by explaining that this included the hedging of currency and the rate risk in these bonds as well as the use of a denominated Government bond future to mitigate the US interest rate risk. Performance risk was further managed by trading the 10-year interest rates of the UK, United States of America, European Union and six other countries with a view to reducing the exposure of the portfolio to interest rates. This measured approach required collateral to be held within the Portfolio which resulted in a higher proportion of derivatives.
The Chairman thanked the representatives of Fidelity International for their excellent presentation and asked that the Committee’s thanks be conveyed to Paul Harris, the outgoing Relationship Director.
RESOLVED: That the presentation from Fidelity International be noted.