Meeting documents

Pension Fund Committee
Friday, 25 August 2006

PF250806-12

Division(s): N/A

Report by the Head of Finance & Procurement and the Independent Financial Adviser

Background

In July 2003 UBS Asset Management were appointed to manage the Pension Fund’s property portfolio and this was incorporated to form part of their multi-asset portfolio.

In July 2003 the property benchmark weighting was 5% of the total assets of the Pension Fund and investments were confined to balanced property fund unit trusts.

In April 2004 UBS wrote to the Officers explaining that the number of balanced funds that they were able to invest in had fallen whilst simultaneously specialist funds had increased from 2% to 20% of the then used benchmark index.

As a result of these market changes the Pension Fund Committee agreed, in May 2004, to allow the property manager to invest up to 25% of the value of the property portfolio in specialist funds. It was further agreed that any single specialist fund should not form more than 10% of the total value of the property portfolio and that there should be evidence of a secondary market for trading in these investment vehicles.

In August 2005, following a strategic asset allocation review, the Pension Fund Committee agreed that the property benchmark weighting should be increased from 5% to 8% and that this should be phased in over a nine month period.

Officer Meeting with the UBS Property Manager in London in July 2006

On 5 July 2006 officers and the Independent Financial Adviser met the UBS Property Manager in London, to discuss the property portfolio. The Manager reported that he still had approximately £7 million to invest in order to achieve Oxfordshire’s 8% property benchmark weighting.

The Manager further reported that the Triton Fund, which is Oxfordshire’s single largest property fund, had been closed for further investment since 1 July, 2005 so there was no opportunity, at least for the time being, to invest in this vehicle. He felt that the most attractive investment opportunities were in specialist funds but because 23% of the property assets were held in these, then the fund was already close to the 25% limit.

The Manager asked officers if the maximum limit on specialist funds could be increased from 25% to 35% of the total property portfolio. He asked if the decision could be made as soon as possible, and preferably not delayed until the next Pension Fund Committee Meeting in August 2006, because there were several investment opportunities in the market at the present time.

View of the Officers and the Independent Financial Adviser

Specialist funds have a higher risk profile than balanced property unit trusts because they normally invest in a single property sector e.g. retail warehouses are leveraged (i.e. they borrow) and can be less liquid. However, because they are higher risk they have the potential to offer higher returns.

Since the property mandate has allowed an exposure to specialist funds the property investment performance has been good. For the twelve months ended 31 March 2006 Oxfordshire achieved a return of 24.9% against a benchmark of 21%. Much of this good performance was attributed to the use of specialist funds.

Officers and the Independent Financial Adviser support the Property Manager’s request to increase the specialist weighting from 25% to 35%. Following the increase in the property strategic benchmark from 5% to 8% (see paragraph 5) the value of the property portfolio has increased from £36 million in September 2005 to £46 million in July 2006. The increase in the value of the property portfolio accommodates the holding of more specialist funds and we take the view that increasing the maximum limit on specialist funds by a further 10% points is a modest but sensible move.

Procedure for agreeing the change in the property benchmark

In paragraph 8 of the report, the Committee is informed that the Property Manager advised the officers that it was in the Pension Fund’s best interest to make an early decision, with regard to extending the limit on specialist funds, because there were investment opportunities in the market.

Officers wrote to the Pension Fund Committee Chairman and Deputy Chairman to seek their agreement, which they granted subject to the Head of Finance & Procurement and the Independent Financial Adviser also agreeing to the proposal (their agreement was also granted). They further requested that the action taken be reported to the August Pension Fund Committee Meeting. All strategic investment decisions would normally be approved by the Pension Fund Committee. However, for the reasons outlined in paragraphs 8 and 12 of the report, the Chief Executive exercised her delegated powers to approve that the maximum percentage of the property portfolio that may be held in specialist funds be increased from 25% to 35%.

RECOMMENDATION

The Committee is RECOMMENDED to note the action taken by the Chief Executive to approve that the maximum percentage of the property portfolio that may be held in specialist funds be increased from 25% to 35%.

SUE SCANE
Head of Finance & Procurement

TONY BUSHELL
Independent Financial Adviser

Contact Officer: Tony Wheeler, Pension Fund Investments Manager, Tel 01865 815287

Background Papers: Nil