Minutes:
Gillian Evans, James Wates, and Emma Burnett-Ray, representing Goldman Sachs, attend the Committee to give a presentation on the performance of the element of the fund invested with Goldman Sachs.
Gillian Evans explained the nature of the mandate held by Goldman Sachs, the nature of the fixed income market, including the types of asset available, and the factors considered when selecting assets invested in. She described the value of the investment with Goldman Sachs, the benchmark for the investment and the investment objective. She said that performance since the inception of the mandate had achieved the objective set, but that performance in 2011 had been poor; she said that James Wates, who worked in the Fixed Income division, would set out the reasons fort that.
Mr Wates described the salient features of the market in 2011. Firstly, yields had been low at the start of the year, but had got lower still as the year went on, both for short-dated and long-dated bonds and securities, with a rally for “risk-free” assets, such as Government debt. Secondly, concerns regarding parts of the Eurozone prompted increasing spreads and increasing stresses in the market in the 3rd quarter of the year. Thirdly, in the wake of those stresses, spreads on other assets with credit characteristics, including corporate bonds, increased, particularly in the 3rd quarter, with the ECB’s action reducing those stresses in the 4th quarter.
Councillor Iggulden asked how this turbulence had affected the portfolio. Mr Wates said that Goldman Sachs had taken the position at the start of 2011 that interest rates were too low and would rise within the year. They had accordingly held short-dated debt, and so did not get the full benefit of falling yields. He said that there had also been contagion as a result of market conditions, with high-levels of risk aversion, which made realising the fundamental value of assets difficult. He said that Goldman Sachs was cautious, and remained cautious, with regards to European Bonds, and believed that the injection of liquidity by the ECB was responsible for the rally. He said that Goldman Sachs had been surprised by the level of, and success of, ECB support, but remained very cautious. However, these positions had led to the underperformance.
Gillian Evans said that it was challenging to operate in an environment in which politics had superseded economics. She said that Goldman Sachs had invested where it was confident of the underlying value of assets. She said that the selection of assets had been correct, but that the duration chosen and the chances and effects of Government intervention misjudged. She said that the fund was up 201 basis points since the start of the year.
Councillor Murphy asked how Goldman Sachs had altered its views and process in light of the underperformance of 2011. Mr Wates said that the view had been based on improving data from the US, and though that showed signs of cooling, the cooling was a result of the mid-cycle slowdown; it proved much more serious than thought. He said that while Goldman Sachs believed that it brought insight to fixed income investment; it would not get every decision correct. He said that the process of analysis and fund management were fundamentally the same.
The Chairman asked whether Goldman Sachs believed that the underlying risk that had prompted the events of August 2011, and the subsequent intervention by the ECB had dissipated, noting that few had seen the market event coming.
Mr Wates said that there were still long term risks, despite the ECB’s intervention allowing the opportunity for structural changes to be made. He said that the fund had been correctly positioned for the 4th quarter of the year. Further to a question from Councillor Botterill, he said that there had been little exposure to the European periphery, and the issues for Goldman Sachs had been contagion across asset classes. He said that Goldman Sachs saw more value in United States securities going forward, and remained concerned about European debt. The investments made were in line with the levels of risk implicit in the investment objective set.
In response to a question from P-Solve, Mr Wates said that a year was too short a horizon to judge performance, with 3 to 5 years a more sensible term. He said that the one year figure was affected by a large loss in Quarter 3 of 2011, which had included August.
He then took the Committee through the remainder of the presentation, pointing out that the allocations showed the way the fund was managed: he noted that the current cash allocation included derivatives which were sensitive to higher yields. He also highlighted the fund’s current thinking on security selection, which was positive towards commodity currencies, certain types of credit impaired security and US Housing market securities issued by Freddie Mac, Fannie Mae and Ginnie Mae.
The Committee thanked Goldman Sachs for attending.
RESOLVED THAT
The presentation be noted.