Agenda item

This paper updates Pensions Sub-Committee Members on an overview of the current fixed income portfolio and its performance.

Kevin Humpherson, Deloitte noted that the purpose of this report was to review the fixed income strategy within the Fund’s portfolio. An overview was provided of the dynamic asset allocation which included managers such as Ruffer and Insight and the following points were noted:

-       Ruffer was appointed to manage an absolute return mandate. Its main purpose within the Fund was to act as a return-seeking diversifier from mainstream equities.

-       Over the past three years to 30 November 2018, the Absolute Return Fund had returned 2.8% p.a. and had underperformed its sterling based benchmark by 1.7% p.a. This was mainly due to its large defensive holdings in markets that had proven to be more stable than predicted.

-       Insight was appointed to manage an active bond portfolio. The Fund invested across a range of bond and bond-like assets, with the aim of delivering positive absolute returns.

-       The Fund had significantly underperformed its 3-month Sterling LIBOR benchmark and target over the year. Insight highlighted that longer term strategic investment decisions had been the key detractor to performance over this period, specifically the Fund’s strategic country allocations.

Kevin Humpherson commented that Deliotte were of the view that Ruffer still offered an effective strategy and the Ruffer Absolute Fund worked well within the overall Fund. However, the Insight Bonds Plus Fund had underperformed its target over the past 3 and 5 years and since inception periods. While it was clear that the underperformance had not been as a result of any change in the investment approach or the risk profile of the strategy, it had highlighted that the current market environment had been particularly challenging for strategies that were reliant on directional macro-economic views. Therefore, it was recommended that the Sub-Committee should consider potential replacements for this strategy where there was more reliance on market returns (beta) as opposed to active manager calls (alpha). In addition, it was also advised that the Sub-Committee be provided with a training session on Buy & Maintain bonds and Asset Backed Securities and interview a selection of managers.

Kevin Humpherson also outlined the secure income allocation which included managers such as Aviva, Oak Hill Advisors, and Partners Group. A breakdown of the performance, including the future direction of each manager was provided. Deloitte were of the view that there was no need to review the infrastructure portfolios as Partners Group and Aviva provided a significant level of diversification whilst producing favourable returns. Furthermore, the Oak Hill, diversified credit strategy offered the overall Fund a degree of liquidity, therefore there was no need to consider changing this investment However, it was advised that the Sub-Committee should review the Partners Group multi asset credit allocation and should consider re-allocating the Partners Group investment as the Fund was in run-off.

Michael Adam, Co-opted Member commented that it was important to diversify away from corporate credit when considering re-allocating the Partners Group investment. In response Kevin Humpherson said that alternative strategies would be explored in the future.

The Chair thanked Deloitte and officers for the useful information shared and recommendations made relating to the current strategy for the Insight Fund and asked what options were available to the Council.  Matt Hopson, Strategic Investment Manager said that should the Sub-Committee decide not to persevere with the Insight Bonds Plus Fund, the contract could be terminated on 15 March 2019. In addition, a cash fund could also be set up with Legal and General Investment Management (LGIM) whilst alternative arrangements were being made.

Councillor Asif Siddique asked whether there was potential for further losses, should the Sub-Committee continue with the Insight Bonds Plus Fund investment strategy. In response Kevin Humpherson, explained that Insight’s underperformance over the past 3 years was largely due to the uncertainty around the challenging market environment for the types of strategies offered by the Fund. It was therefore advised that this strategy was no longer appropriate for the Pension Fund and it was recommended to look at potential replacements to avoid further loses.

The Chair asked whether there would be any transactional costs involved if the Council proceeded with the termination of the contract. In response Matt Hopson said that there would be no penalty charges, however transactional costs may apply.

Members agreed that the Insight Fund was no longer appropriate for the portfolio in the long-term. They felt that it would be better to terminate the contract and requested that the allocation be liquidated as soon as possible, given the reasons outlined above and alternative options should be explored that were better suited for the Fund.

RESOLVED –

-       THAT, the Sub-Committee noted the current composition in the fixed income portfolio.

-       THAT, the Sub-Committee approved the recommendation to continue with the investments with Oak Hill and Ruffer (held through LCIV) and agreed this in principle.

-       THAT, the Sub-Committee approved the switch of fixed income strategy (currently the Insight Bonds Plus mandate) to a market return driven approach in either buy and maintain bonds or asset backed securities. As the current strategy with Insight is no longer fit for purpose, the Sub-Committee indicated they would like the Insight contract to be terminated as quickly as possible.

-       THAT, the Sub-Committee noted the private asset allocation with the view to look at alternative options in the market before committing further to Partners Group.