Agenda item

This paper provides the Pension Fund Sub-Committee with a summary of the Pension Fund’s overall performance for the quarter ended 31 December 2018.

The Chair welcomed Andy Burgess, and Gary Wilkinson, Insight Investment to provide a presentation in relation to the performance of the Bonds Plus Fund. The following points were outlined:

-       Organisational functions had grown over the last few years, ensuring that teams were well resourced to manage sophisticated mandates. The team that was managing the Council’s portfolio had been in place for many years, highlighting this as an advantage.

-       An overview of the Fund’s valuation and performance at 31 December 2018 was provided. It was noted that the performance of the Bonds Plus Fund was disappointing. As a result of the underperformance the Fund had not achieved the expected return on investment as anticipated.

-       The difference between the German and U.S. government bond markets was highlighted.

-       It was noted that the underperformance was driven by the Fund’s position in emerging markets and oil related currencies such as Russian rouble and Norwegian krone. In addition, the Eurozone economy grew less than expected in the third quarter, particularly due to political aspects.

Phil Triggs, Director of Treasury & Pensions asked whether emerging market economies were sensitive to the increases in U.S. interest rates. In response Andy Burgess said that this did contribute to the Fund’s under-performing position in emerging markets. Furthermore, another factor that was weighing on emerging markets was the U.S. and China trade/tariff discussions. This had led to an overall softness in global economic activity, i.e. trade expectations had fallen globally.

In response to a question from the Sub-Committee relating to risk allocation, Insight provided an overview of their risk framework and explained how this was managed in line with their risk budget. The role of the framework was to allocate risks between different asset classes. The risk budget was biased towards government bond type ideas rather than credit markets in the long-term. In addition, it was noted that the risk framework was closely monitored alongside the tracking error.

Michael Adam, Co-opted Member queried why Insight had been committed to the U.S. versus Germany trade, given that from a macro perspective there had been environmental changes over the last year. Insight said that their expectations for German government bond yields had fallen compared to 2018. In addition, European yields had also fallen faster than expected and were pricing in significantly weaker growth than what was forecasted. Although the absolute level of yields had dropped, the difference between these and the U.S. yields had remained attractive.

Michael Adam, Co-opted Member commented that given Insight’s underperformance over the last three years, a cash deposit would have been a more suitable investment for the Fund. Furthermore, he felt that there was more risk involved when investing in macro type trades due to the uncertainty around the challenging market conditions.

Phil Triggs, Director of Treasury & Pensions queried whether there was any suggestion for a reduction in fees going forward. Insight explained that currently fees were 50bp, however given the performance of the fund the fees would be reviewed to reflect a reduction. However, in addition there would be a performance fee of 10% above the benchmark.

The Chair thanked Insight for the presentation and the contributions made to the meeting.

Kevin Humpherson, Deloitte provided an overview of the Pension Fund’s overall investment performance. He noted that the total fund returned -5.8% over the quarter to 31 December 2018 on a net fee basis, underperforming the fixed weight benchmark by 2.4%. The three-year rolling excess return had remained negative over the quarter, declining slightly since the third quarter of 2018. The negative performance could be attributed to underperformance by Majedie, Ruffer and Oak Hill.

Michael Adam, Co-opted Member commented that, whilst Equity and Fixed income investments each reflected very different risk and return profiles, the figures had suggested that fixed income investments had proven to be more defensive given the current market conditions in comparison to equity investments.

Following a request from Members relating to the figures for Barnet Waddingham, these were tabled during the meeting and an update was provided relating to the September valuation.

The cashflow monitor showed both the current account and invested cash movements for the last quarter, as well as cashflow forecasts to September 2019. An analysis of the differences between the actuals and the forecasts for the quarter was provided to the Sub-Committee.

RESOLVED -

THAT, the Sub-Committee noted the report.