Agenda item

This item was preceded by a training item from KPMG on investing in infrastructure. Key points highlighted were as follows:-

·         There were two main categories of infrastructure: economic and social. Economic infrastructure could be broken down into three types - throughput (e.g. roads), regulated (e.g. energy and utilities) and contracted (e.g. telecommunication assets).

·         Infrastructure assets were classified as brownfield or greenfield; brownfield assets were established and less risky while Greenfield assets were slightly more risky but usually offered a higher return.

·         Infrastructure assets were considered to be a good investment for the LGPS fund as they generally offered a long term and stable option.

·         Infrastructure projects were typically financed with a small element of equity capital and significant borrowing (debt).

·         The Fund currently employed Macquarie to invest in the equity of infrastructure projects.

·         There were eight key areas of risk. Councillors were advised that the Manager of the Fund needed to be mindful of political risk and operational risk and able to identify areas of good value. It was recommended that any commitment to this type of investment be proportionate - it could take time to identify appropriate areas for investment.

·         Members were informed that Infrastructure Equity offered an attractive long term return and a relatively high, stable and secure income.

·         With regards to Infrastructure Debt, a key risk of both senior and junior debt was credit risk (risk of default). The risks of both senior and junior debt were similar with the exception of Concentration risk which applied exclusively to senior debt.

Members requested clarification regarding the variation in risk relating to brownfield / greenfield assets and enquired as to how the additional risk associated with investing in greenfield assets could be compensated for. It was confirmed that greenfield and brownfield projects had different risk profiles but a reasonable premium would be sought if investing in Greenfield assets.

It was confirmed that the return of 2% / 3% cited in the report was a relative return. Members were referred to the management report which detailed the assets currently held and the returns on each.

Councillors were informed that index-linked senior debt offered a lower margin of approximately -1.8% which was poor value; positive values would be expected as a minimum.

Members expressed concern regarding the security of investments in China. It was confirmed that total investment across America, India, China and Europe was minimal. Investment in China and India had been less profitable due to governance issues in those areas; however, it would be difficult to draw back said money as it had already been committed.

The Committee commented that the situation regarding Ruffer was an area of concern hence it was recommended that other options be explored. The nature of any potential offer from the LCIV was unknown at this stage and it was agreed that readily accessible investment options would be preferable. Immediate savings would be made in the move from Ruffer which would mitigate any transfer costs involved in such a move. It was reported that Members of the Pensions Board were supportive of the Committee's recommendations.

The Committee discussed the implementation of the allocation to long dated inflation linked property. The short listed funds were considered, as was a further delay in implementation of this asset allocation to consider waiting for the London CIV to provide an offering in this space. Due to the significant unknowns of what the LCIV would offer, or when, Members agreed it best carry out fiduciary duties in relation to management of the fund and implement the strategic asset allocation by awarding to Legal and General.

Members discussed ESG issues noted in the report and highlighted that climate change was a risk to the fund.

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

RESOLVED That the Committee:-

1.    Considered and discussed the issues raised in the training item;

2.    Agreed to disinvest in Ruffer and bring alternative options for consideration to the next Pensions Committee;

3.    Agreed to award the Long-Dated inflation linked property mandate to Legal and General (LGIM);

4.    Agreed to delegate the implementation of any decisions to the Officer and Advisor - Investment Strategy Group.