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ITEM PF13
PENSION FUND
COMMITTEE – 25 NOVEMBER 2005
PROGRESS
ON REBALANCING TO THE NEW STRATEGIC BENCHMARK AND IMPLEMENTING THE TACTICAL
ASSET ALLOCATION FUND
Report by
the Head of Finance & Procurement
Introduction
- At the August
2005 Pension Fund Committee meeting members agreed to the new strategic
asset allocation shown in Table 1, Annex 1 (download
as .xls file). They also agreed that the portfolio managed by
Alliance Bernstein should be moved, phased if necessary, from their
Global Diversified Value platform to their Global Value platform. Finally
they agreed that the Fund should invest around 3% in the UBS Tactical
Asset Allocation Fund.
- This report explains
the progress made in implementing these changes.
Meeting
at the Offices of UBS Global Asset Management on 13 September
2005
- Officers and the
Independent Financial Adviser met the UBS multi asset portfolio team,
property manager, private equity advisers and hedge fund management
team at the offices of UBS in London, on 13 September 2005. The purpose
of the meeting was to discuss how the newly agreed asset changes would
be managed and implemented.
- With regards to
private equity officers met the private equity brokers to discuss
the various options for increasing the Fund’s private equity weighting
from 4% to 6%. Following further discussions with the Independent Financial
Adviser it has been decided to recommend the Committee to invest the
additional 2% in a private fund of funds product, which is a departure
from the previous policy of investing in quoted investment trusts. A
review on the Fund’s private equity arrangements is the subject of a
further report being considered at this meeting.
- Discussions were
held with the multi-asset management team, from UBS, as to how easily
the new asset allocation changes to the multi asset portfolio
could be made. Annex 1 compares the new asset allocation (Table 1) with
the previous one (Table 2). UBS advised that all the changes could be
achieved smoothly and efficiently by 31 December 2005, with the exception
of property.
- The UBS property
manager advised that it was in the Pension Fund’s best interests if
the increase in the UBS property weighting from 14.7% to 25.3%
was phased in. He explained that property unit trusts are much less
liquid than the other mainstream investment assets. Furthermore, the
Triton Fund, which is UBS’s flagship property fund, and in which the
Oxfordshire Fund is invested, has been temporarily closed since July
2005 to protect existing investors due the large flow of new investment.
- It was agreed
that that the increased property weighting should be phased in over
three quarters, unless there was an earlier opportunity to invest. Annex
2 (download as .doc file)
sets out the agreed phasing profile. Although cash is shown as the substitute
benchmark for property, in the quarters ending 31 December 2005 and
31 March 2006, UBS have the option to invest in other asset classes
if they feel there are better investment opportunities, which is more
than likely to be the position.
- With regard to
hedge funds, the UBS Hedge Fund Management team said that they
had been disappointed with the investment performance of the GAM II
Fund They explained that this fund has a large trading strategy bias,
a style that tends to do well when markets are volatile. However, market
volatility had been low over the last twelve months, which had produced
disappointing performance and they did not foresee this situation changing.
As a consequence they decided to sell out of this holding. Similarly
the Martello Fund, which also focuses on trading strategies, had also
performed poorly so this has been redeemed too.
- UBS set out their
newly proposed hedge fund portfolio, which is shown in Annex 3 (download
as .doc file).
- There was also
some discussion on the benchmark being used to measure the investment
performance of the hedge funds. The UBS Hedge Fund manager said that
it was always their policy to hedge all of Oxfordshire’s hedge funds
back to sterling. However, because the HFRI index, which was Oxfordshire’s
benchmark, is dollar based this occasionally made comparisons misleading,
particularly during periods when there had been large US dollar v sterling
fluctuations.
- It was agreed
that a more appropriate benchmark would be 3 month LIBOR
(London Inter Bank Offer Rate), which is the cash deposit rate used
by the London clearing banks, plus 3%. It was agreed that the
hedge fund manager’s objective should be to achieve this benchmark
over rolling three-year periods.
- Oxfordshire’s
reason for investing in hedge funds is to achieve diversification and
reduce risk at the total fund level. Hedge Funds aim to produce absolute
returns, which is attractive when equity markets are falling. The new
benchmark and manager target have been chosen as they better reflect
Oxfordshire’s reasons for investing in hedge funds.
- However, notwithstanding
the above benchmark and target changes, UBS will also continue to compare
and report Oxfordshire’s hedge fund investment performance against the
HFRI Index.
- With regards to
the Tactical Asset Allocation Fund, UBS explained that it still
had to go through a few external regulatory hurdles. They did not foresee
any problems with this and expected the Fund to be launched in the second
half of November. Until such time as the TAA Fund was launched, UBS
said that they would continue with the current position of actively
managing the tactical asset allocation within the multi asset portfolio.
- In early November
UBS informed officers that all the regulatory hurdles had been cleared
and it was agreed that the TAA Fund would be officially launched on
30 November.
Meeting
at the Offices of Alliance Bernstein on 28 September 2005
- Officers and the
Independent Financial Adviser met with Alliance Bernstein at their offices
in London on 28 September 2005. Alliance Bernstein said the switch of
Oxfordshire’s investments into their Global Value Fund would
take two weeks. It was anticipated that most of the switch would be
conducted through a programme trade, which would be the most cost effective
means of carrying out the restructuring. Many of the existing investments
would be retained and the portfolio’s turnover was not expected to be
more than 28%.
- A comparison between
the current portfolio and the proposed new portfolio was provided and
is shown in Annex 4 (download
as .doc file). One feature worth noting is that the risk characteristics
of the Global Value Fund are more attractive than the previously held
Global Diversified Fund. This is because the Global Value Fund is more
globally diversified with a lower exposure to the UK market, which is
quite concentrated in terms of sectors. The portfolio distribution is
not fixed and will change reflecting Alliance Bernstein’s views on markets,
sectors and individual share prices.
- It was agreed
that the portfolio’s new benchmark would be the FTSE All World Index
and the objective would be to achieve a 3% per annum return above
the benchmark over rolling three year periods, gross of fees. The
expected tracking error to be applied for risk control purposes was
4 to 6%. It was also agreed that the manager should continue to be allowed
to hedge currency because currency movements can be an important consideration
in the global stock selection process.
Rebalancing
to the Strategic Benchmark
- The Oxfordshire
Pension Fund was rebalanced to the new strategic benchmark as at 30
September 2005. During October 2005 £36.85 million of cash, held in-house,
was transferred to the UBS Multi Asset portfolio, UBS hedge fund managers,
Baillie Gifford UK Equity portfolio and Legal & General UK Bond
portfolio. Paradoxically, Alliance Bernstein had to return cash, which
is a reflection on how strong their investment performance has been
since they were appointed in July 2003.
- Although the benchmark
weighting for private equity has been increased from 4% to 6% it may
not be possible to achieve the new weighting over the shorter term,
especially if we decide to invest in a private fund of funds (see paragraph
4). Normally investing in a fund of funds requires cash to be drawn
down as and when the investment in new companies is made, and this can
take place over a four to five year period. As a consequence it was
decided that private equity should be excluded from the rebalancing
process. Achieving the eventual 6% weighting can readily be accommodated
from the Pension Fund’s positive cashflow.
- Now that the new
strategic asset allocation is broadly in place any build up of surplus
in-house cash can regularly be re-allocated to the managers for rebalancing
purposes. In addition, every so often, particularly if there is a more
material drift away from the strategic benchmark, it may be necessary
to transfer funds between managers in order to rebalance.
RECOMMENDATION
- The Committee
is RECOMMENDED to note the report.
SUE SCANE
Head of Finance
& Procurement
Background Papers: Nil
Contact Officer: Tony
Wheeler. Tel (01865) 815287
November 2005.
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