Agenda item

11:35

This report will cover an overview of the financial markets, the overall performance of the Fund’s investment against the Investment Strategy Statement and commentary on any issues related to the specific investment portfolios. The report includes the quarterly investment performance monitoring report from Brunel.

The new Independent Advisor, John Arthur, presented the report to the Committee. The Independent Advisor gave his background to the Committee. The points highlighted from the report included that the Fund fell in value this quarter by 0.3% to £3.212bn. It was behind the benchmark over the medium and long-term. The poor performance was largely driven by the performance of the Brunel Global Sustainable Equity Portfolio which returned -4.2% over the quarter against a 0.7% rise in the MSCI All Countries Global Equity benchmark. The Global High Alpha Equity portfolio also fell by -0.6% underperforming its benchmark by -1.2%. Against this, the Funds Private Equity allocation, both held directly and via Brunel, performed well as did the private debt allocation, however, Infrastructure and Secure Income performed more poorly. Driven partially by this quarter’s underperformance, the fund was now lagging its benchmark over 3 years (by -2.0%), 5 years (-0.7%) and 10 years (-0.1%) but the returns of 7.2% per annum over the last ten years, being above funds actuarial assumption for future investment returns, would have driven much of the improvement in the funding ratio between the triannual actuarial revaluations.

The Independent Advisor continued to update the Committee on the report. He noted that inflation was falling across the developed world and interest rates had reached their peak and would soon begin to fall, but likely to remain higher than targeted for longer than previously expected.   He noted a number of demographic factors impacting on future growth, as well as the problems in China in terms of their weak Covid recovery and on-going property issues.  Going forward, decarbonisation of the economy which would also be an inflationary pressure In the view of the Independent Advisor, inflation was unlikely to drop below 3% on a sustainable basis, it was likely to be more volatile and higher on average than seen before. It was the view of the Independent Advisor that there would a recession next year.

The Chair asked for clarification on the US dollar point, the Independent Advisor explained that the strength of the US Dollar was driven by the US economy, which in turn was driven by the strength of the US consumer, assuming that the dollar was appreciating in other countries. In times of stress, people bought dollars as they believed that it was the safest currency. With the way politics was currently in the US, the debt level was increasing, the debt itself had been downgraded by the credit rating agencies, undermining the dollar strength.

Members raised the following points:

·       Sterling was more overvalued than the dollar in the current economy.

·       4% inflation would help the UK economy, leading to reduced interest rates.

·       Since Brunel did not have a short-term government bond that the fund could invest in, would the alternate be increasing the cash position because that would give a closer position to a guaranteed return. This was not known.

·       There was support for a UK smaller companies index linked allocation or FTSE 250 allocation and it would be good to see an update from Officers to whether Brunel had created this fund as asked for and it was good to see the Independent Advisor endorsing the approach.

·       The sustainable equities that had underperformed quite significantly.  It had been recommended that Brunel was challenged, and the manager of the fund be asked for a review. It would be good to take this forward. It would be good to scrutinise Brunel and the manager to understand why. The Chair and Vice Chair agreed with the action. The Independent Advisor commented that it was an unfortunate time to launch the fund but Brunel, as a pool, were stronger in their commitments to environmental issues and the wider responsible investments sphere than any other pool and the LGPS sector was ahead of the corporate sector. It was important to challenge Brunel.

·       For the UK mandate, work was being done with Brunel and other funds. Three of the funds who were currently invested had agreed to support change but the decision from the fourth fund was outstanding.. The request would now be made that Brunel take forward the proposal. It would still be 6-9 months before money was put into it.

·       What was causing the underperformance and since making the decision on China some time back, how was this playing out? The Independent Advisor commented that there had been a number of issues of why the portfolios had underperformed. The Independent Advisor felt that Brunel was doing the correct thing, but the challenge was necessary to hold Brunel to account.

·       The Committee requested that the private equities and legacy holdings be broken down so that the Committee could see the figures clearly.

ACTION: A summary to be sent to Members and the report reinstated to include in future reports.

RESOLVED: that the Committee formally requested Officers to set up further opportunities for training in respective private equity in context of private equity and high interest rates. Challenge Brunel on the portfolio that was underperforming and request an updated review of the manager. Have a split of what equities were international and European. And on the alternative investments, Officers to ask Brunel to provide the necessary data to conduct the review of alternate investments.

The Chair requested that the Independent Advisors report clearly state the recommendations as in other reports.