Minutes:
Scott Jamieson, Pensions Advisor, attended the meeting and provided the Board with a presentation on the background to the asset allocation of the Hillingdon Pension Fund.
The Board was informed that there was an element of risk in the investment strategy of fund managers. In summary:
· Actuarial arithmetic required that assets generated a 3% real return.
· Reference was made to the real return available from long term risk-free index linked bonds being -1% per annum. The Board was informed that the shortfall had to be made up through either a risk-based asset strategy or through higher pension contributions. Members were informed that actuaries now took a long term investment view and it was recognised that contributions would have to go up at some point.
· Equity markets had compounded at 6% (real per annum) but the Board was informed that when equity markets fell, they sometimes fell very heavily.
· The scheme currently employed an asset strategy which was pursuing a less than 4% real return. This combined a mix of equities and bonds.
Discussion took place on the investment outlook and the following comments were made:
· Low interest rates had become the norm.
· The world economic growth was set to remain moderate and insufficient to address indebtedness burden.
· Deflationary pressures were set to remain
· Not a lot of Inflation.
· Corporate earnings as a percentage of GDP were elevated.
· Currency volatility was high and was fuelled by competitive devaluations.
· Macro-economic policy explicitly supported real assets, but there were significant risks.
· World economy was maturing with a greater number of people living longer which resulted in a greater number of dependencies.
· Reference was made to systematic threats in China and the possibility of leaving the European Union.
· Bonds were now on negative yields.
· There had to be a focus on passive management with a focus on costs.
Reference was made to the key points around the Fund Construction, whereby the current difficult conditions were expected to persist over medium term. Returns needed to be "ground out" without taking excessive risks.
The Fund was structured to collect illiquidity premia, to collect contractual income streams, to capture under-priced defensive equity growth, to diversify asset allocation risk and to keep costs down.
The Board was provided with details of the spread of the Fund's current asset allocation and discussion took place on the investment strategy adopted.
Members were provided with details of the Equity Strategy (46% Assets under Management):
· The Investment Outlook supported risk-taking but with a defensive bias.
· The general approach was to maintain a reduced cost defensive strategy which combined passive funds with yield focused and vale active allocations.
· 'Value' style pursued cheap stocks on a high yield.
· Shares with a long term track record of raising dividends were pursued which were a proven style.
· Costs were reduced with significant passive exposure.
Reference was made to the equity managers and UBS who had been retained since 1989. Their focus was on pursuing stocks with a high yield and low price earnings ratio. In 2013 UBS advised the Fund to reduce their equity, which duly happened.
Another equity manager, Newton, had been retained since 2013 as part of the implementation to increase Fund focus on resilient higher yielding stock. Reference was made to recent decisions which had been made regarding allocation amongst equity managers.
The Board was provided with information on the Bond Strategy which equated to 19% of Assets under Management.
Mainstream bond yields were very low and reference was made to the current programme which was focused on UK and European opportunities. The Board noted the phenomenal target returns of 15% per annum.
Information was provided on Infrastructure, Property, Multi-asset which equated to 35% of Assets under Management. Reference was made to Ruffer and their strategy which targeted returns equivalent to 8% per annum through a traditional approach.
It was noted that decisions on the Investment Strategy were made by the Pension Committee giving due consideration to their fiduciary duty to the Hillingdon Fund.
Discussion took place on risks and concerns, and particularly around the impact of pooling. Members were informed that it was too early to see what the implications would be of pooling the Hillingdon Pension Fund assets through the London Collective Investment Vehicle (CIV).
Members asked that they be given the opportunity to comment on what would be available through CIV.
RESOLVED:
1. That the information provided be noted.