Agenda item

This report follows a request from Majedie to broaden their UK equity investment mandate to include a maximum of 20% overseas listed equities. Discussions on this report will be preceded by a presentation from Majedie.

Simon Hazlitt, relationship manager, and Rob Harris, fund manager, attended the Committee to explain Majedie’s request to vary the terms of the Council’s mandate to allow it to invest 20% of funds in overseas equities.

Simon Hazlitt set out Majedie’s performance from the inception of the mandate, noting that it had closed its funds a year after receiving the H & F contract, giving Majedie greater freedom of manoeuvre and ensuring a closer focus on existing clients. He then explained the recent performance of the funds, and explained the factors that Majedie believed would influence future equity performance, and would influence their decision making process.

He said that, while Majedie remained positive regarding London-listed equities as a whole, it was felt that certain sectors were underrepresented in it, meaning that stock related risk was higher, with holdings necessarily concentrated in a few stocks. He gave, as examples, the pharmaceutical sector, given the small number of large cap pharmaceutical companies listed in London, and the technology sector, which was poorly represented on the London exchanges.

He concluded by saying that the change was not structural but would enable Majedie to have additional options as it sought to exceed the benchmark.

The Chairman noted that Majedie had not coupled London-listed stocks with the UK economy, or sought to purchase overseas stocks in pursuit of overseas earnings. Mr Hazlitt confirmed that this was Majedie’s view, and that London was a thoroughly internationalised market with good exposure to overseas earning. He said that Majedie also believed that London-listed equities were well-priced, and the smaller exchange made investment more practical. However, it was felt necessary to have some flexibility for the reasons described given earlier.

Councillor Ivimy asked what funds the Council had invested with Majedie, and where these were held. Mr Hazlitt said that the Council had £136.8 million invested, £90 million in Majedie’s UK Equities fund, £35 million in the UK Focus fund, and £10 million in Tortoise, a long/short absolute return fund, focused on delivering steady returns. In response to a further question from Councillor Ivimy, he set out the fee structure applying to each element of the Council’s holdings, and how these were affected by performance. He said that there would be no increase in fees as a result of the change, but there would be an increase in custodial costs, offset by what Majedie believed to be the greater advantages of the new arrangements.

With regards to the Tortoise fund, Mr Hazlitt confirmed that it was able to invest overseas, for up to 45% of its holdings. It was also allowed to undertake short selling, doing this through the purchase of contracts for difference, with gross exposure greater than the value of the investment. However, the fund did not use financial gearing, and was designed to ensure steady returns, with a focus on performing well in adverse market conditions.

Eugenie White said that the Committee had been misadvised with regards to its investment in the Tortoise Fund, which she believed had been to increase exposure to emerging markets, rather than to allow short-selling. Officers agreed to check the background of the decision.

Eugenie White said that the UK/London market was currently unfashionable and potentially undervalued, with companies trading there benefiting from a weak currency. She asked if it was correct to purchase overseas stocks at a time of currency weakness, currency risk being one of the reasons why pension funds were generally invested locally.

Rob Harris said that the correlation between equity market returns and GDP growth were historically weaker than generally supposed, and that Majedie only wished to make investments overseas where it was felt it would genuinely add value. He confirmed that the UK market remained attractive and the fund’s main focus.

Councillor Iggulden asked whether Majedie could expect to outperform American fund managers in selecting technology stocks, for example. Mr Hazlitt said that the Tortoise fund had performed very strongly when investing overseas, and that that technological basis of stock selection at Majedie now made it able to invest overseas.

In response to a question from Councillor Iggulden, Mr Hazlitt clarified that the changes would apply to the UK Equities and UK Focus products, but the Council could chose to opt out of the change for its UK Equities holding.

The Chairman thanked Majedie for attending. The Committee agreed that the proposal should be agreed, but wanted to look at its allocations more widely, in advance of the next actuarial valuation in 2013.

RESOLVED THAT

(i)                 That the request from Majedie to revise the mandate to allow 20% of funds to be invested in overseas equities be agreed, and;

(ii)               That officers investigate the advice given regarding Tortoise, short-selling and emerging market equities and report back to the Committee, and;

(iii)             That officers bring forth a report to a future meeting on the allocation of the fund’s assets.