Avon Pension Fund Committee - Investment Panel
Thursday, 25th February, 2010
BATH AND NORTH EAST SOMERSET COUNCIL
AVON PENSION FUND COMMITTEE
DRAFT MINUTES OF THE MEETING OF 25 FEBRUARY 2010
Present: Cllr David Bellotti, Ann Berresford, Cllr Mary Blatchford, Bill Marshall, Cllr Gordon Wood
Also in attendance: Tony Bartlett (Head of Business, Finance and Pensions), Matt Betts (Assistant Investments Manager), Tony Earnshaw (Independent Investments Advisor), Liz Feinstein (Investments Manager), Julie Martin (Investments and Custody Relationship Officer), David Lyons (Divisional Director, JLT Benefit Solutions Ltd), Tessa Page (JLT Benefit Solutions Ltd)
40 EMERGENCY EVACUATION PROCEDURE
The Clerk read out the procedure.
41 APOLOGIES FOR ABSENCE AND SUBSTITUTIONS
Apologies were received from Cllr Gabriel Batt.
42 DECLARATIONS OF INTEREST
There were none.
43 TO ANNOUNCE ANY URGENT BUSINESS AGREED BY THE CHAIRMAN
It was agreed that the draft minutes of Panel meetings would be circulated to all members for comment.
44 ITEMS FROM THE PUBLIC - TO RECEIVE DEPUTATIONS, STATEMENTS, PETITIONS OR QUESTIONS
There were none.
45 ITEMS FROM COUNCILLORS AND CO-OPTED AND ADDED MEMBERS
A Member commented that the Fund could have made more money from the recent reversal of the tactical bond position if it had been executed more quickly. He suggested that there was a need for the Panel to "gear itself up" for prompter action. The Head of Business Finance and Pensions responded that the problem was that an exit strategy had not been agreed at the same time as the switch was agreed.
46 MINUTES: 27TH NOVEMBER 2009
These were approved as a correct record and signed by the Chairman.
47 SOCIALLY RESPONSIBLE INVESTMENT AND CORPORATE GOVERNANCE OPTIONS
The Assistant Investments Manager introduced this item. He reminded Members that at the previous meeting they had requested further work to be done on Socially Responsible Investment (SRI) and corporate governance. Accordingly, JLT had prepared the paper attached as an Appendix to the agenda report.
Mr Lyons gave a presentation. A copy of the presentation is given as pages 3-8 of Appendix 1 to these minutes. The presentation summarised the main conclusions from a detailed report by JLT that formed part of the agenda papers.
He acknowledged that the fiduciary duty of the Fund was paramount, but suggested that this duty meant that all approaches to investing should be considered within the fiduciary framework. There was no standard definition of SRI and approaches to SRI are continually evolving, so the Fund can formulate its own definition. There was no conclusive evidence that SRI added value, largely because of differences in investment approach.
Slide 4 of the presentation summarised the policy choices that had to be made in relation to SRI. SRI could be implemented through specialist managers, as the Fund did at present through Jupiter, or through an overarching policy. Different SRI overlays could be applied to the underlying investments, which could also be combined with corporate governance objectives. However, it was much more difficult and costly to apply overlays to pooled funds. An SRI policy could be based on exclusions, i.e. not investing in companies involved in certain products or activities. However, such a policy tended to generate more volatile returns and more risk (variability of returns). The Fund's current mandate with Jupiter includes a number of exclusions. However, in recent years the trend in the investment industry has evolved away from an exclusionary approach and towards inclusion and engagement within mandates. Investors, by using their shareholding to engage with companies, can influence management to move in a desired direction. It was important to assess carefully the benefits and costs of each of these approaches. Mr Lyons considered that an exclusionary approach would result in more volatile returns and that SRI activism would require a considerable resource, which was not available in house and is therefore a more costly approach.
Slide 5 summarised the policy options in relation to corporate governance. Issues to be considered included:
- Should voting at company meetings continue to be delegated to investment managers or should the Fund adopt an overarching policy?
- Should voting by investment managers be monitored more closely?
- Should there be a greater level of engagement with companies?
If a decision were made to adopt an overarching policy, there are a small number of overlay providers, who typically followed a common approach and charged similar fees. It was difficult to evaluate the impact of this approach. Greater engagement could be implemented through an overlay provider; however there would be a substantial charge for this service. Also the provider would use its own agenda of what to engage on, on behalf of all its clients.
There are companies who could provide regular information on how investment managers have voted at shareholder meetings and whether the voting was in accordance with the policy specified by investors. This service was available from more providers than the previous option and was significantly cheaper.
The estimated costs of each of these approaches were summarised on slide 6. Proxy voting (where 3rd party votes on behalf of the Fund) would cost between £10,000 and £30,000 p.a. Engagement overlay would cost between £60,000 and £150,000 depending in the mandate; A vote monitoring service would cost about £10,000 p.a. In response to a question from a Member, the Investments Manager clarified that only 10% of the assets were managed on a segregated (equity) basis where the Fund has the opportunity for greater engagement and 5% is already managed by Jupiter with an SRI mandate. Thus an engagement overlay approach would be particularly expensive if applied only to the segregated equity assets.
The Investments Manager suggested that a vote monitoring product, by revealing where investment managers had voted out of line with their stated policy, would make it possible to get a clearer picture of their overall strategy. A Member however, thought that there was a difference between active engagement and mere vote checking. She felt that monitoring voting did not really allow you to get "under the skin" of the company. The Investments Manager agreed and said that the alerts issued by the Local Authority Pension Funds Forum (LAPFF) were an important source of information on governance issues for officers of the Fund, as they gave the local authority stance on various issues.
Mr Lyons said that one of the easiest ways of implementing SRI/corporate governance would be to incorporate it in the tender documents issued to prospective investment managers. This would ensure that the Fund's commitment to SRI and governance issues were clearly set out and it would be more cost effective. The onus would be on the manager appointed to comply with the mandate and to report exceptions with reasons for non-compliance and details of corrective action taken. He discussed the Jupiter mandate, noting that it excluded investment in various sectors, including extractive industries. However, in the post credit-crunch upturn, resource stocks along with financials had recovered most strongly, limiting Jupiter's recent returns. Jupiter was also restricted to the UK equity market, which was only 10% of the global market. Within the global context UK companies were generally considered to have good corporate governance, as illustrated, for example, in the separation of the role of Chairman and Chief Executive which is less widespread in the US. A substantial UK investor in a US company would have the opportunity to influence the US company to adopt UK corporate governance standards.
A Member agreed that the Fund was not benefiting from the recent rise in Shell's share price and, unlike investors in Shell who had launched a major campaign at a shareholder's meeting about the environmental impact of developing the Canadian tar sands, could not influence the company's social and environmental policy. Another Member thought that while the fiduciary duty was important, it was not the Fund's only duty; local authority investment was different, and there were some things that the Fund simply could not support. The Head of Business Finance and Pensions suggested that the fiduciary duty should be balanced against risk and expected returns and that Members needed to consider the impact on the Fund's overall investment strategy if more assets are allocated to SRI mandates.
Members considered the table comparing returns between Jupiter and its peers given on slide 8. The Independent Investments Adviser commented that even a five-year period was rather short for judging risks and returns on investments. However, he believed that a broader, non-exclusionary approach would reduce volatility and remove some short-term variability in returns. Mr Lyons pointed out that manager A, who had achieved the highest short-term return, had the fewest constraints within its mandate. A Member said that the table provided evidence that the present restrictions on the Jupiter mandate were costing the Fund in terms of performance. Another Member disputed that the table provided enough information to determine the impact in the long term. Mr Lyons summarised the position with regard to Jupiter as follows: the investment industry had moved away from an exclusionary approach, so that the Jupiter mandate was now out of line with current practice; Jupiter's performance has been impacted over the short term by the exclusion constraints but this does also impact the longer term returns and thus the removal of some of Jupiter's constraints could improve returns.
Members and officers debated the case for and against removing restrictions in the Jupiter mandate on investment in companies involved in certain activities. Arguments advanced for reducing the restrictions were:
- the Fund would achieve a better return on its investment with Jupiter
- the Fund would achieve greater value from the skills it was buying from Jupiter
- there would be less short-term volatility in the investment return
- the Fund would have greater influence over companies in which it had invested
- Arguments advanced against changing the current Jupiter mandate were:
- the Fund's investment policy should be for the long term - the table of comparative returns did not suggest that Jupiter was any better or worse than any other manager with an SRI mandate over the longer term
- in the interests of diversity the Fund should have an overarching SRI policy and still use a specialist SRI investment company
- there was no information as to whether investment in oil or nuclear, for example, would benefit the Fund
Mr Lyons suggested that even with a wider mandate Jupiter could remain as a special investor for SRI and ESG (Environmental, Social, and Corporate Governance).
A Member suggested that Jupiter's mandate should be made more inclusive with respect to UK equities now, and that the Panel should review whether or not to widen it from UK only to global at a later date. The majority of Members agreed that Jupiter's mandate should be modified to remove some of the existing restrictions (i.e. have a more inclusive approach). However, one Member was not persuaded that the case for change had been made. Members agreed that it would be helpful to have more information from Jupiter on the implications of changing the mandate. In addition one Member considered a modification to the SRI mandate as a change in policy and on that basis could not support the recommendation to modify the mandate.
A Member argued that there was no case for an SRI engagement overlay, noting the comment on page 10 of the presentation that there was no evidence that it added value. Another Member felt that more information about the costs of this option was needed. It was agreed that that this option should be reviewed in a year with more detailed information about costs and about the practice of other local authorities being provided to the Panel.
Members agreed that information from the LAPFF should be provided regularly to the Panel and Committee, possibly through the quarterly investment performance report and that LAPFF should be invited to present to the Panel at a future date. ..
The Panel RESOLVED to recommend to the Avon Pension Fund Committee
(1) to appoint a vote monitoring service.
(2) To make Jupiter's mandate more inclusive with respect to UK equities (subject to further information requested by the Panel)
(3) to report quarterly to committee on LAPFF activity
48 EQUITY PORTFOLIO
Mr Lyons introduced this item. He gave a presentation summarising the paper prepared by JLT attached as Appendix 1 to the agenda report. A copy of his slides is contained in Appendix 2 to the covering report.
Mr Lyons reminded Members that at its meeting on 18 December 2009 the Avon Pension Fund Committee had referred back to the Panel the recommendation to allocate 10% of the equity portfolio to a global unconstrained equity manager. A recap of the proposals was given on slide 12. The table at the top of slide 13 showed the expected risk/return of different equity mixes. He explained that "alpha" and "beta" were industry jargon denoting the value added by an investment manager and the return from the market respectively. Beta was always the largest component of the return. The table showed that the marginal rate of increase in absolute risk was low when the proportion invested in overseas markets was increased. The table at the bottom of slide 13 showed the effect of different management styles in terms of risk and returns for different proportions of equity split. Again, the increases in risk were relatively small for greater expected returns. The table on slide 14 showed the different characteristics between passive, core and unconstrained management styles for a global equity mandate. He recalled that the definition of "unconstrained" had caused some debate at the Committee meeting on 18 December. An explanation of the term was given on page 5 of the JLT paper. An unconstrained manager was one who would have incrementally less regard for their benchmark index than either a passive or core manager.
Members agreed that the Fund should invest in an Unconstrained Global Equity Manager. They then discussed how SRI could be incorporated into this portfolio. They considered the "mandate specifications for potential inclusion in a contract notice" given on page 7 of the JLT paper. Mr Lyons recommended that as few restrictions as possible should be put in the contract notice and that SRI should rather be emphasised in the tender questionnaires. The Investments Manager agreed, and said that restrictions in the contract notice might deter some investment managers from tendering, leaving only a small selection to choose from. A Member suggested that the important thing was the Fund's direction of travel in relation to SRI, but he recognised the need to be realistic. Nevertheless, he had strong feelings about, for example, the use of child labour by companies. He thought a strong showing on SRI could be used as a criterion for distinguishing between tenders.
RESOLVED to recommend to the Avon Pension Fund Committee:
(i) to appoint an Unconstrained Global Equity Manager to manage 10% of the equity portfolio.
(ii) to state in the contract notice that the Fund is working towards achieving the UN PRI standard.
49 PERFORMANCE REPORT
The Investments Manager presented the report. She drew attention to the comments in the attached paper by JLT on the underperformance of MAN and Jupiter.
A Member said that the most useful information for him was that given in paragraph 4.3 of the covering report:
"The total Fund's assets rose in value by £609m over the last quarter, with a value of £2,302m at the end of December 2009."
However, he would have preferred a somewhat fuller statement. The Fund had diverse investments, some of which had done well, others less well. He would have appreciated information in the summary statement about the performance of the different parts of the Fund. This kind of factual information was important, as it gave employers and employees the means to refute media headlines about the pensions crisis. Another Member suggested that performance reports should include information showing measures of progress in relation to Fund objectives rather than just funding versus liabilities. The Investments Manager noted that the quarterly performance report submitted to the Committee contained the information requested by the members, whereas this report focussed on the performance of the individual managers. There were no issues to bring to the Committee's attention.
RESOLVED to note Fund's return on investments and details of manager performance as set out in the report.
50 STATEMENT OF INVESTMENT PRINCIPLES
The Investments Manager presented the report. She explained that the revised Statement took account of all developments since 18 December 2008, when the last Statement was approved. The principle developments were:
1. A change in asset allocation from UK equities to Overseas equities.
2. Inclusion of the Fund's stock lending policy.
3. Updated statement of compliance with the revised Myners principles.
She said that the Fund complied with all the revised Myners principles, although there were areas where compliance could be strengthened. It was also now a requirement that changes to the Statement had to be reported within six months.
A Member noted that there was no mention of extractive industries in paragraph 19, which stated the exclusions from the SRI portfolio. It was suggested by another Member that "for example" should be added before the exclusions, to show that the list was not exhaustive.
A Member thought that it was not good enough for the Fund merely to comply with best practice. Members had to be confident that the Fund had good governance. He suggested that Overview and Scrutiny had a role in relation to the governance of the Fund.
A Member said that another pension fund with which she was associated had just had a governance review. She said she would provide a copy of the review report to officers. The review dealt with basic things, such as was paperwork circulated in time, was the chair effective, whether decisions were clear, etc. Members agreed that frameworks for self-assessment and for training would be helpful.
The Investments Manager suggested that the Annual Report of the Fund needed to be more robust in stating the decisions taken by the Avon Pension Fund Committee and the reasons on which the decisions were based.
In response to a comment from the Independent Advisor, it was agreed that "in this context" should be inserted after "SRI means" in line 5 of paragraph 18 of the Statement.
Responding to a question from a Member, the Investments Manager said that she thought very few local authority pension funds had separate schemes for different categories of employer.
The Panel identified two action points to strengthen compliance over the next 12 months; (1) development of a framework for member training, incorporating the Knowledge and Skills Framework issued by CIPFA in January 2010; (2) development of a self assessment framework to assess the effectiveness of the decision-making processes of the Committee.
(i) to recommend to the Avon Pension Fund Committee that it approve the revised Statement of Investment Principles as amended (including an updated appendix on Myners compliance attached as an appendix to the report);
Members noted the workplans.
It was agreed that the Panel would meet on all day on 22nd April in Bath for a workshop to meet investment managers and in the afternoon of 27th May for a Panel Meeting. Members would be consulted by email about their availability for additional dates.
The meeting ended at 17.05pm.