Agenda and minutes

Representatives of the Fund Manager, BlackRock, presented a report on the quarterly performance of its Pension Fund investment mandate.

They highlighted that in Q3 the Fund had outperformed the Index, and explained that BlackRock was lobbying the FTSE to address the issue of artificial tracking on the performance and risk vs. index figures for Japan and the Pacific Rim on the basis that the liquidity profile of the stock was a concern. The inclusion of this information was giving rise to an accounting issue.

In response to questions from Councillors, the Fund Manager stated

1)    that the Impact Indices measure a range of governance matters including gender diversity, longevity, staff turnover, employee opinions

2)    that transition to the CIV would cost the Borough £68,000 but that this cost would be offset by savings over time. Bonds could continue to be managed by BlackRock as they are now

3)    as regards stock lending, returns are split between the Pension Fund and BlackRock on a 62.5%/ 37.5% basis. All costs of the programme are incurred by BlackRock.

Councillor Maslin questioned the ethics of short selling. The Fund Managers explained that short selling increases volatility in the market on a daily basis but that this is balanced by market forces over time. They added that short selling generates an additional return and cannot cause the Fund to suffer a fall in stock value beyond what it owns. The Committee could decide not to short sell but to do so would have to change to a segregated fund which would attract a higher fee.

As regards fossil fuels, the Fund Managers explained that the Impact Indices consider the carbon footprints of listed equity companies as it’s a key issue for investors. BlackRock offers ex fossil fuel funds or a segregated portfolio that excludes a specific sector but again, that would have a higher cost and may impact on returns.

The Chair thanked the Fund Managers.

RESOLVED that the report be noted.

Digby Armstrong of Fund Manager UBS presented a summary report on the performance of its investment mandate in Q3.

He informed the Committee that Q3 witnessed the highest volatility in the market since the collapse of Lehmann Brothers, with the United States seeing the beginning of wage growth and showing signs that interest rates may be increased. There was weakness in the Chinese markets. The UK lagged behind and he predicted that it would be another year before interest rates would rise. The Fund Manager considered the outlook to be reasonable and highlighted that the Fund had received an annualised return of just less than 10% since 2008.

It was noted that UBS provides details of the proxy voting record in its quarterly report.

The Chair asked about ethical considerations. The Fund Manager replied that it is hard to tell whether ethical issues are reflected in the share price but certainly fossil fuels/ carbon footprint is a hot topic for investors. As a passive manager it is harder to influence the market: active managers have greater investor power.

The Chair thanked the Fund Manager.

RESOLVED that the report be noted.

Prior to considering this report, the Chair requested that, following the meeting, officers ask BlackRock for its proxy voting record.

The Committee received the Annual Report on the Pension Fund activities for the year ending 31 March 2015, which was supplied with the audited Pension Fund accounts for 2014/15.

The Chair requested that a summary of upcoming training opportunities be included on the agenda front page.

Councillor Best questioned why the Permitted Observer positions on the Committee were largely vacant. The Head of Corporate Resources explained that the Unions were engaged through the Local Pension Board (LPB).

Councillor Hooks asked whether training could take the form of self-learning, for example e-learning. The Head of Corporate Resources agreed that this would be possible and explained that LPB members were keeping individual training records and completing online modules.

Councillor Ingleby, referring to the report’s foreword by the Chair of the Pensions Investment Committee, felt that that paragraph 2.4 should be changed  to read as follows:

“With the new government signalling its desire to push Local Government Pension Schemes towards pooled investments or structures of an as yet undetermined form, the years of individual LGPS Borough schemes such as ours could be numbered.

And yet, we celebrate the recent birth of the first ever FCA authorised and fully local government owned funds manager, the London CIV (Collective Investment Vehicle), of which we are a member, ready to begin operating later this year as the first ever public sector-run funds manager in the UK financial markets – more than a century after the first wave of municipal-led innovations in our cities.

The CIV offers the opportunities to both save on managers’ fees as well as to potentially target socially useful investment, such as some infrastructure projects, without compromising the primary purpose of LGPS funds, to obtain best value for their members’ pensions.

The Pensions Investment Committee has also helped to set up the Pension Board, which is able to oversee both our work as well as the actual liabilities and administration of pension disbursements, in line with recent government requirements.”

Councillor Best pointed out that reference to “Chairman” in paragraph 2.1 of the foreword should be changed to “Chair”.

The Committee’s Investment Consultant, Albert Chen (Hymans Robertson), proposed the following rewording of paragraphs 5.9 and 5.11:

“5.9 The Fund's asset allocation is provided below.  Details of the Fund's managers and mandates are set out at 5.16”

5.11 replace last sentence with: “The Fund regularly reviews asset allocations in line with the agreed investment strategy to consider whether rebalancing is required.”

RESOLVED that

a)    the Head of Corporate Resources write to the relevant bodies and re-invite them to appoint representatives to be Permitted Observers to the Committee

b)    the Head of Corporate Resources clarify with the Pensioners Representative on the LPB whether this Representative also wishes to be an Observer of the Committee

c)    the Head of Corporate Resources circulate online training materials to Committee Members

d)    The foreword and paragraphs 5.1 and 5.9 of  ...  view the full minutes text for item 5.

The Hymans Robertson Investment Consultant (IC) presented the Committee with a report which set out the performance of the Pension Fund investment portfolio and the performance of individual managers for the quarter ended 30 September 2015.

The IC summarised that global equity markets had recorded their worst thee month returns in four years but offered reassurance that the Pension Fund’s private equity mandate was performing well and that benefits would be seen over time.

At the previous meeting, the Committee accepted Hymans Robertson’s recommendation to downgrade Schroeders citing staffing concerns. Since then, Schroeders has strengthened its team which, while not enough to raise the score, did offer some comfort that it was addressing the situation to manage the portfolio efficiently.

Of the BlackRock presentation, the IC observed that he was not familiar with the Impact portfolio but committed to looking into it.

The IC highlighted that whereas the BlackRock presentation had been quite detailed and broke the information down into individual funds, the UBS presentation lacked that level of detail. However, broadly speaking, he was comfortable with each of them as passive Fund Managers.

The IC questioned the validity of the alternative beta indices in the 3 down years (02, 08, 11) as the indices were taken subsequent to the reporting period and applied retrospectively. Overall, it was the IC’s view that smart beta was a good way of diversifying the portfolio.

RESOLVED that the report and Hymans Robertson appendix be noted.

The Committee considered a confidential report and received a presentation from the Investment Consultant, which explained the scoring criteria used and how it was applied to produce a shortlist of 6 Fund Managers. The next stage in the selection process would be an all-day event on 10 December. The IC said he would send the Committee a briefing paper a week ahead of the meeting, together with a suggested scoring sheet.

The Chair sought clarification of some of the terminology used, which the IC duly provided.

RESOLVED that the report be noted.

The meeting closed at 9.10 p.m.