Agenda item

Investment Strategy and Fund Manager Performance  (Agenda Item 5)

Consideration was given to a report that provided Members with an overview of fund performance as at 31 December 2017, cash flow and expenditure summary for fund activity in the year, progress of the London CIV, regulatory updates and recent voting and engagement.

The Committee was informed that the total size of the fund was £1,009m as at 31 December 2017, which was an increase of £31m from £978m at the end of the last quarter. This represented an overall investment return over the quarter of 3.08%, which was a relative underperformance of the benchmark by 0.44%.

The Committee was presented with a draft Investment Strategy training presentation, which set out the current asset allocation and suggestions for changes to the strategy moving forward.

The current asset allocation was confirmed to be well diversified, with the allocation exploiting long term investments, including Direct Lending, Infrastructure, and Private Equity; however with limited direct inflation protection. While there was some reliance on equity markets, the expected return was forecast to be above the Actuary’s requirement.

Consideration of the risks inherent to the current strategy resulted in the following proposed changes to the strategy:

1. Introduction of Long Lease Property: Long dated, inflation linked, contractual income (a change of +5%)

2. Reduce Equity: Trim equity exposure to reduce overall risk. Review regional allocations and consider different global indices

3. Restructure Bond Portfolio: Expected return has reduced; recommended to redeploy in diversified credit portfolio/index linked gilts

4. Tidy: Trim DGF in favour of revised bond portfolio (Ruffer remains defensively positioned and heavily weighted to index linked gilts)

Regarding regional allocation, it was confirmed that the current allocation was significantly skewed towards UK Equities (>50% of allocation). While the UK was diversified, this exposed the Fund to specific concentration risks in terms of both sector and stock risk in relation to the market cap. To address this, the following changes were proposed:

1. Fund the reduction in listed equities form the UBS portfolio (to reduce the equity exposure and UK bias)

2. Redeploy the LGIM UK regional equity allocation (9% of total assets) into a developed marked cap

3. Move the US, Europe, Japan and Pacific overseas allocations with LGIM into a developed marked cap based fund

Private credit was currently underweight while the fund awaited committed funds to be deployed. It was suggested that the Council consider the London CIV’s imminent launch of a Direct Lending strategy to increase/maintain allocation in the longer term. In addition, the London CIV was to launch a Diversified Credit Fund, which was recommended to be reviewed against JP Morgan in due course, although it was anticipated that this fund may have higher fees than the current fund.

The Committee approved the above changes, and agreed that the implementation of these changes be delegated to the Officer and Advisor Investment Strategy Group.

It was recommended that the Committee request that officers review the potential use of AEW – UK Real Return Fund, who targeted a gap in the market between long lease or balanced funds.  KPMG Investment Advisory viewed AEW as advantageous in that, as they did not follow an index, they were free to find smaller assets in alternative, often overlooked sectors, which were undervalued and could be missed by traditional approaches. The Committee requested that officers investigate further on AEW and other offerings and put forward a recommendation on allocating the funds at a future meeting of the Committee.

In Part II of the agenda, the Committee received information on the current market update which covered the current market climate and performance of various investment vehicles, updates on Managers' reports, an update of the London CIV.

RESOLVED:

1. That the Committee considered and discussed any issues  raised in the training item;

2.  That the Committee discussed and noted the performance update and agreed any required decisions in respect of mandates or Fund Managers;

3.  That the implementation of strategic allocation weighting changes including bond restructure and regional allocations be delegated to the Officer and Advisor Investment Strategy Group;

4.  That further detail on proposed allocation to long dated inflation linked property be brought to a future meeting of the Pensions Committee.