Agenda and minutes

The Chair welcomed everyone to the meeting.

At this point in the meeting declarations of interest are received from Members in any of the agenda items under consideration at the meeting. Members are asked to complete the green interest forms circulated to groups in their pre-meetings (which will be announced at the Council Meeting) to indicate:

(a) The agenda item number in which they have an interest to declare.

(b) The nature of their interest.

(c) Whether their interest is a disclosable pecuniary interest or an other interest,  (as defined in Part 2, A and B of the Code of Conduct and Rules for Registration of Interests)

Any Member who needs to clarify any matters relating to the declaration of interests is recommended to seek advice from the Council’s Monitoring Officer or a member of his staff before the meeting to expedite dealing with the item during the meeting.

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The Panel noted the minutes of the previous meeting.

David Vickers, Chief Investment Officer, Brunel addressed the Panel and gave them a presentation, a summary of the presentation is set out below.

·  PMI – Shows broad measures of economic growth

·  Renewed demand for commodities

·  Credit spreads are back near pre-Covid levels

·  More bankruptcies were experienced in 2019 than in 2020

·  A decade of potentially lower returns should be expected

·  Value stocks have risen since the Covid vaccination scheme began

Macro outlook

•  Economies well on the way to recovery driven by stimulus.

•  Global vaccine deployment is allowing markets to “look through lockdowns and outbreaks”

•  Pent up demand and high savings rate can spur on the economy.

•  High debt levels keep interest rates low

•  We are early in the economic cycle, but….

•  Equity valuations are not cheap, the boost from lower interest rates is over.

•  Credit spreads are at or near all-time lows and companies are more indebted than ever.

•  Inflation is picking up (base effect) but the future path of inflation is unclear

Steve Turner, Mercer asked if those outlook points were likely to make it easier or harder to invest in a climate orientated way.

David Vickers replied that while periods of underperformance for certain types strategies should be expected, in the long-term the inherent quality factor of Brunel portfolios should be additive to returns. He commented that in the current environment he had seen the equity market rally broaden out beyond traditional value stocks in the energy and banking sectors. He referred to the recent case of the Dutch Government ruling that Shell’s emissions targets should be accelerated as indicative of the market’s direction of travel.

Other key market trends

Themes for consideration include:

·  Unwinding of fiscal stimulus

·  Trade tensions

·  Political risk e.g. Taiwan

·  A change in the global tax system

·  A wave of defaults as stimulus and forbearance is withdrawn

·  Investing in China – Human Rights issues / Modern Slavery

·  Cyber risk

·  Climate change – an integral part of how we manage your assets, but a new trend for some!

·  A continued and prolonged change in equity leadership from growth to value

Councillor Paul Crossley asked if the speed at which capital was being invested in sustainable and ‘green’ investments could create artificially high valuations, posing a significant risk to ‘green’ investment strategies. 

David Vickers replied that there is dispersion among regions as to how far advanced they are in adopting ‘green’ and sustainable investment strategies, with the UK leading the way. Certain markets, including the US, are less well advanced indicating that the market remains robust. 

Shirley Marsh-Hughes asked if Brunel would consider all of their portfolios to be sustainable.

David Vickers replied that they all are except for the ones that are passive. He added that all the active portfolios are sustainable with a big ESG input into them.

Pauline Gordon asked if there were any key differences between the developed and emerging markets in terms of the macros highlighted.

David Vickers replied that emerging markets  ...  view the full minutes text for item 8.

The purpose of this report is to set out a more robust and efficient governance framework for the Investment Risk Management Strategies which includes the Equity Protection, Liability Driven Investing, Low Risk Funding Strategy and Foreign Exchange hedging strategies.

The Group Manager for Funding, Investment & Risk introduced the report to the Panel and highlighted the following points from it.

The governance has evolved as the strategies have developed and been implemented involving significant and ongoing Investment Panel engagement. The strategies are now at a point where the role of the Committee needs to focus on ongoing delivery of investment objectives and strategic effectiveness rather than broader detailed operational aspects.

The proposed framework therefore addresses the following:

a) The role of the Committee and Panel in terms of strategic oversight of the

Risk Management strategies

b) The operational arrangements to agree structures and implementation of

the strategies

c) Timeliness of decision making given need to react to market environment

A Funding and Risk Management Group (FRMG) will formalise the decision-making process. It will consist of Officers (including Head of Pensions),

Investment & Risk Consultants and the Fund Actuary. This will ensure both the

funding and investment aspects of each strategy are holistically considered.

There will be a Terms of Reference (ToR) for the group and minutes of each

meeting will be provided to the Investment Panel. FRMG will meet at least

quarterly to review in depth the strategies, with the ability to convene more

frequent meetings as necessary depending on market conditions or whether

action needed to control risk or change the structures (in order to ensure the

strategic outcome is delivered). FRMG meetings will cover both strategic and

operational matters. All actions and decisions of the FRMG will be reported to

the next Panel meeting.

John Finch commented that he felt that it was right to separate the operational and strategic roles.

Shirley Marsh-Hughes said that she felt the formation of the FRMG made good sense, but she was concerned about the timing of the Panel hearing from them only every quarter.

The Group Manager for Funding, Investment & Risk replied that if required an emergency meeting of the Panel could be called and added that the notes of the Group meetings could be shared with the Panel.

The Head of Business Finance & Pensions added that officers will do the best they can to communicate with all parties on decisions taken.

The Panel is supportive of the formation of a FRMG, notes the proposed changes within the report and that proposed changes to the Terms of Reference will be considered at full Committee.

The Fund has several legacy portfolios that need to either be managed down as a result of strategic asset allocation decisions or transitioned to Brunel portfolios.

The Investments Manager introduced this report to the Panel. He explained that the Fund has several legacy portfolios that need to either be managed down as a result of strategic asset allocation decisions or transitioned to Brunel portfolios.

He said that a number of the legacy portfolios are illiquid or not easily sold, for example hedge funds, infrastructure, and therefore will have to be managed down over time.

He stated that officers will report back to Panel on an annual basis as to the progress made in winding down legacy portfolios.

The Panel noted the report.

This paper reports on the performance of the Fund’s investment managers and seeks to update the Panel on routine aspects of the Fund’s investments. The report contains performance statistics for period ending 31 March 2021.

The Investments Manager introduced this report to the Panel and highlighted the following areas from within it.

Private Markets Investments: Pace of deployment within the renewable infrastructure portfolio remained steady over the quarter, reflective of the fact the Brunel portfolio focuses on high-quality, essential services. The Secured Income portfolio saw a notable pickup in pace of deployment due to increased acquisition activity of underlying managers.

The Brunel private debt portfolio launched during the period and is expected to start drawing down in May on the Fund’s £245m commitment.

The re-registration of the Fund’s UK property assets (to be managed by Brunel)

commenced in January. As part of the transition the Fund committed £10m to an affordable housing fund, which works with regional house builders to develop new-build housing for the underserved affordable rental sector.

Redemptions in non-transferable funds held by the legacy UK property manager are expected to conclude by the end 2Q 2021.

Steve Turner, Mercer addressed the Panel on their report (Appendix 2) and said that it had been reformatted to focus on forward looking strategic issues and that they would welcome any comments from the Panel.

Joshua Caughey, Mercer highlighted to the Panel some areas from the report.

Market background

Economic data continued to point towards a global recovery but with wide regional dispersions. Markets looked beyond the temporary setbacks created by Covid-19 restrictions. This led to another quarter of positive returns for risk assets and weaker performance for defensive assets, in

particular government bonds.

In terms of market outlook Mercer continues to prefer emerging market equities and to a lesser extent small cap equities. Within growth fixed income, we revised the outlook for loans marginally higher at the expense of high yield following the recent high yield outperformance.

Within defensive fixed income, we continue to like securitised bonds on a relative basis and remain on the underweight side of neutral in UK sovereign bonds and index- linked bonds. We think that government bonds yields will move higher on the back of strong economic growth and a pick-up in inflation. We expect inflation to rise sharply over the next few months as economies reopen , but we expect this will largely be temporary.

Funding level attribution

The Fund’s assets returned 2.7% over the quarter, whilst the liabilities are

expected to have increased by c. 0.6% due to the rise in inflation. The combined effect of this, also allowing for cashflow over the period, saw the funding level improve from 95% to 97%. The funding level is estimated to have increased by c.13% over the year to 31 March 2021.

Pauline Gordon asked if any further comment could be given on the 3 year Value at Risk (VaR) figures which were now significantly lower than what they were under the static system.

Steve Turner, Mercer replied that they have changed the way they were modelling the equity protection and have assumed that the protection qualities are permanent. He added that they were also reporting  ...  view the full minutes text for item 11.

This report sets out the forward agenda for the Panel for 2021.  It is provisional as the Panel will respond to issues as they arise and as work is delegated from the Committee. 

The Group Manager for Funding, Investment & Risk introduced this report to the Panel. She said that the Panel will need to agree meeting dates for 2022 at some point in the near future and added that an Equity Review was planned for September 2021 and this would likely include a workshop prior to the Panel meeting being held.

The Panel noted the report.