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 September 2012. It is attached as Appendix 1.

John Conroy and Nikhil Aggarwal, P-Solve, presented an update on the 3^rd quarter performance of the pension fund, and gave a verbal update on the 4^th quarter. Mr Aggarwal said that quarter 3 had been on-risk, after a period in which attitudes had switched from quarter to quarter between on and off-risk.

In response to a question from Councillor Iggulden, Mr Conroy said that the on-risk, off risk parlance reflected the way in which market sentiment was reflected in shifts between asset classes: these shifts had intensified, both in scale and frequency, since the financial crisis. As part of this shift, a smaller group of assets, specifically the sovereign debt of a small group of countries, including the UK, had been identified as off-risk.

Mr Aggarwal said that improved sentiment reflected the decision of the US Federal Reserve to continue its quantative easing programme, and the increased liquidity provided by the European Central Bank. The change saw a fall in gilt prices and a rise in the value of equities. The quarter 4 position had been more stable than recent quarters, but there remained concerns that the recovery in on-risk asset prices did not reflect economic fundamentals.

Mr Aggarwal said that, as gilt prices were closely linked to the fund’s liabilities, this meant that the fund’s liability benchmark had fallen during quarter 3, and the fund as a whole had performed well. Mr Conroy said that the LGIM mandate had performed as expected in tracking the liabilities, and this was reflected in its fall. He added that it also tracked the Quarter 4 rise in inflation expectations.

Councillor Murphy asked about the recent changes in fund managers at Barings. Mr Conroy said that the asset allocation sector was, after a long period of eclipse, experiencing growth again. As a consequence, experienced managers were in demand. He said that P-Solve were unconcerned about the change in managers, as the head and deputy head of the fund remained in place, and the replacement appeared to have the relevant experience and background. He said that a larger concern, in light of the growing investment in the sector, was the quantity of funds under management. He said that, while there was still some way to go before Barings reached the figure at which P-Solve believed it would be appropriate to close the fund, a decision to breach that limit, in contravention of their stated intention, would raise questions about their ability to move with the speed that effective asset allocation required.

The Chairman asked whether, in the light of the macro position, Barings and Ruffer had operated with sufficient tactical aggression in their asset allocation, in particular in relation to the equities market. Mr Conroy said that the Barings mandate had achieved its benchmark over the period required, and that the fund retained a significant exposure to equities through the MFS and Majedie mandates. It was open to Barings to substantially increase the equities held by the fund, but Barings remained cautious about the overall picture.

The Chairman asked whether the benchmark was sufficiently challenging. MR Conroy said that, for much of the period between 2008 and 2010, it had been very challenging. He added that it was difficult to maintain strategy when returns appeared to be improving.

The Chairman said that his impression was that the asset allocation mandates had insufficiently captured the rise in equity values. Mr Conroy said that Baring’ view remained that the macro-economic outlook was poor, but they had moved into equities to some degree. With regards to Ruffer, who remained very cautious, he said that the concerns were more valid, and that P-Solve would meet with them to discuss their plans.

The Chairman asked whether Goldman Sachs had been sufficiently stretched by their benchmark. Mr Conroy said that the mandate had performed as the Committee had requested it to. He said that his view was that the Council’s managers were performing as asked, with an appropriate time to review the structure and character of the fund being the next actuarial valuation.

He said that it was understandable that the Committee would wish to crystallise the gains made in bond holdings, but the underlying economic picture remained forbidding, with the risk of inflation high, and stagflation possible.

Councillor Iggulden said that there was growth in the world economy and the fund, if oriented correctly, could avoid the risk suggested, particularly if an appropriately long-term view was taken. Mr Conroy said that inflation in the UK would affect the liabilities of the fund, but that otherwise such a strategy could be effective. It would be a strategic decision, however.

Councillor Ginn asked if the fund had property holdings. Mr Conroy said that the illiquid nature of property made it difficult to manage property funds, with 12 month exit “gates” common. He said that Barings were seeking to create a fund that the Dynamic Asset Allocation managers would be able to invest in, and able to make decisions to enter and exit in accordance with market conditions. In response to a question from the Chairman on listed property, he said that the performance of listed property was too closely correlated to that of equities as a class to allow it to function as a discreet investment.

RESOLVED THAT

The report be noted.