Agenda item

This report prepared by P-Solve, provides details of the performance and the market value of the Council’s pension fund investments for the quarter ending 30^th June 2012.

John Conroy, P-Solve, introduced the quarterly report to the 30^th June 2012, and set out the market conditions that had served as the background to that performance. He said that global markets were experiencing a period of unprecedented instability, in which attitudes to risk meant that assets were bought and sold at prices that did not necessarily relate to their underlying value. He said that this was particularly the case with US, German and UK index linked gilts, the last of which had a considerable impact on the fund.

He said that risk aversion had caused yields on index-linked gilts to fall to their lowest ever level. He said that a number of factors and uncertainties were contributing to this environment, including the problems in the Eurozone, the fiscal cliff faced by the United States and the possibility of a “hard landing” for the Chinese economy. He said that this had resulted in money flowing into UK gilts in search of a safe haven, even if the underlying position of the UK economy and government finances did not necessarily warrant this.

He said that, in the quarter year under review, the fund had underperformed the liability benchmark, though this underperformance should be set against the performance of the Legal and General benchmark, which illustrated the high rise in gilt prices. He then set out the performance of individual managers, outlining the chief factors affecting their performance.

Councillor Murphy asked how Majedie has performed against the FTSE All Share. Mr Conroy said that this could be seen by subtracting 2% from their performance. He said that this showed a clear underperformance in the most recent period, but that there had been out performance on a 1 and 2 year rolling basis.

Councillor Ivimy asked about the fund’s lack of exposure to non-index linked government bonds. Mr Conroy said that funds in general did not hold a high quantity of that type of asset, and that there was uncertainty around the asset class, given the high prices for gilts.

Councillor Ivimy asked why, given that its intended purpose and ability to short stocks, the Tortoise Fund had not contributed stronger performance during the turbulent period. Mr Conroy said that Majedie would argue that this was a result of stock specific return, that shorts could fail, and that pricing of shares was showing extremes of valuation which might caused managers to purchase shares rather than sell. Bob Pearce, Pension Fund Accountant, said that the Tortoise Fund was home to around of 8% of the Council’s investment with Majedie, so short positions taken would be relatively small.

Mr Pearce said that, with regards to the performance of the Fund as a whole, it had been in the 6^th percentile of local authority funds in the previous financial year, with those funds that had outperformed it being closed funds, invested entirely in index-linked gilts. He noted the extreme fluctuation in markets, which had seen the fund’s value rise to £650 million in the present quarter before falling back to £639 million at the date of the meeting.

Councillor Murphy asked, in light of the unusual and unprecedented market conditions, how well the fund’s managers were able to cope, particularly if such conditions were to become normal. Mr Conroy said that there were both strategic and tactical considerations. He said that he was confident that the Fund had the right strategic position and that its assets were allocated appropriately. However, he said that there was the possibility that interest rates could remain as low as they were at present for the medium to long term, as had happened in Japan, and this would affect what position was taken on holding equities. He also drew attention to the debate around the inflation measurement. He said that any changes in the strategy, however, moving excess returns from the Matching Fund, would raise the issue of what was a more appropriate asset class for those funds to be used on, given the function of the matching fund. In response to a question from the Chairman, he said that the current market position meant that options would be extremely expensive, due to the difficulty of finding a counterparty. He said that it was his view, and that of officers, that the next valuation would be the appropriate time to review strategy and those charged with implementing it.

Mr Pearce said that, to give comparison, the fund had returned 8.2% for the financial year 2011/2012 which compared very favourably with other London Local Authorities whose returns ranged from 8.2% to 2.6%, with Majedie returning 6.5% against an average of 2.2% for managers in their class, placing them in the 5^th percentile, while MFS returned 7.2% against 2.1% for managers in their class, placing them in the 1^st percentile. He said that both Ruffer and Barings also outperformed the average fund return, at 4.8 and 4.7% respectively. Mr Conroy said that, notwithstanding any future changes to the structure of the fund, P-Solve were satisfied with the performance of the Dynamic Asset Allocation mandates.

Mr Conroy concluded by saying that two managers from Majedie’s ex-UK equities team had departed, with the funds they managed to be wound up. He did not believe that this would have a direct impact on the management of the Council’s funds.

RESOLVED THAT

(i)         The report be noted.

(ii)        That the Committee record a vote of thanks to Bob Pearce for the advice and expertise he had given during his service with the Council, and wish him luck for his retirement.