Agenda and minutes

The Chairman 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.

There were none.

Councillor Paul Crossley had sent his apologies to the Panel.

The Chairman addressed the Panel and made the following statement regarding the Fund in relation to the recent Russian invasion of Ukraine.

Now that we have terminated our dedicated Emerging Markets portfolio, we only invest in developed world benchmarked funds. Therefore, any exposure to Russia will be very small and only through active stock selection decisions of our managers.  However, given our ESG focus, it would be very unlikely that our active equity managers would invest in Russian stocks. We do have a small exposure through our MAC portfolio. In line with their Responsible Investment policy Brunel will be monitoring their managers to ensure all companies comply with UN principles on Business Human Rights and will consider what engagement is needed with companies as a result of this situation.

Mel Clarke addressed the Panel, a copy of her statement is attached as an online appendix to these minutes, a summary is set out below.

Whilst I acknowledge the progress made by APF in reducing the climate intensity of the fund, I feel that the dire state of the climate emergency means that the fund’s commitment “to become a carbon neutral pension fund by 2050 or earlier” (1) is not sufficient.  According to research by the campaign group UK Divest at the end of 2020, the fund's total fossil fuel investments were over £100 Million (3).

Global emissions continue to rise and people in the global south are suffering.

Pension funds have been engaging with the fossil fuel industry for three decades. 

Shell is the fossil fuel company most heavily invested in by Local Government Pension funds.  Shell has set a target of reaching net-zero by 2050, with an interim target of cutting the carbon intensity of its output by 20% by the end of the decade.

In May 2021, a Dutch court ruled that Shell must cut its net carbon emissions by 45% by 2030. The ruling noted that Shell’s current target of a 20% reduction is not sufficient to prevent global temperatures rising more than 1.5°C, in line with the Paris Agreement.  Shell has since confirmed that it will appealing the ruling. Surely any company truly committed to net-zero would not appeal against a legally binding, independent court ruling that says they must make their operations Paris-aligned?

The world’s 60 largest banks financed nearly $4tn in fossil fuel projects between 2016 and 2020, according to a March report from a coalition of climate organisations including the Rainforest Action Network (RAN), Sierra Club, BankTrack and more (4). Much of this money is lent to banks by pension funds.

Whilst gas and oil prices have recently demonstrated a temporary rebound following the COVID pandemic, in the long term, greener funds have better prospects.  A recent article on the FT adviser website stated that “Renewable energy infrastructure is tipped to be 2022 winner and could be the best performing asset class of 2022, according to a survey of investment company managers” (4). 

I put it to you that the case for rapid divestment from Fossil Fuels is overwhelming so please do it now.

The Chairman thanked her for her statement on behalf of the Panel and said that a written response would be sent in due course. He added that the Fund has put in place challenging intermediate carbon reduction goals for its equity portfolio between now and 2030 which are kept under review.

There were none.

The Panel were minded to approve the minutes.

The investment cycles for the Brunel private markets are every two years. Cycle 3 (2022-2024) portfolio specifications have been finalised and new capital committed will be invested from April 2022. Brunel will provide an update on the Cycle 1 & 2 portfolios as well as a Cycle 3 forward-look at the meeting.

The Investments Manager introduced this report to the Panel. He explained that representatives from Brunel will provide an update on the Cycle 1 & 2 portfolios as well as a Cycle 3 forward-look in line with their presentation (Exempt Appendix 1).

He added that representatives from Mercer were also present and have provided assurance that the Cycle 3 private market portfolios still meet our strategic objectives (Exempt Appendix 2).

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel noted the capital being committed to Cycle 3 private market

portfolios to reach the existing strategic allocations as outlined in Exempt

Appendix 2.

This paper reports on the performance of the Brunel and legacy portfolios and seeks to update the Panel on routine aspects of the Fund’s investments. The report contains performance statistics for periods ending 31 December 2021.

The Investments Manager introduced this report to the Panel and highlighted the following points.

·  No concerns to flag with any of the Brunel portfolios this quarter.

·  The Global Sustainable Equity portfolio again posted strong performance, achieving a 6.8% absolute return over the quarter, which was 0.5% ahead of its benchmark due to positive sector allocation.

·  The High Alpha portfolio returned 6.3% in absolute terms, underperforming the index by 1.1% and the underperformance is understood.

·  The quarter saw a number of portfolio changes in line with recommendations from the Equity Review. October saw a £575m sale from Brunel’s Low Carbon Passive portfolio into their new Paris Aligned Benchmark (PAB) Fund, while in December the Emerging Markets portfolio was sold (c£275m) with proceeds being fully re-invested in Global High Alpha.

Josh Caughey, Mercer addressed the Panel and highlighted points from within Appendix 2 – Performance Report.

Market background: The fourth quarter of 2021 came with a number of challenges. Global supply chains remained stretched and the new Covid-19 variant was discovered mid-quarter. Soaring inflation also forced some major central banks to accelerate their exit strategies from ultra-loose monetary policies.

In spite of these headwinds, risk assets fared reasonably well with a few exceptions. Inflation expectations increased and gilt yields generally declined slightly over the quarter.

Funding level and risk: The funding level is estimated to have improved over Q4 to c.102% as asset growth outweighed the rise in the value of the liabilities. It is estimated to have increased by 7% over the year to 31^st December 2021.

The Value-at-Risk rose over the quarter to £1,233m, mainly due to the increased allocation to equities under the new strategic asset allocation. Risk as a proportion of liabilities is lower compared to last year thanks to the decision to move to the dynamic equity option strategy.

Performance: Most assets delivered positive returns over the quarter, particularly the global equity portfolios. Property and infrastructure also generally fared well.

Relative performance was mixed at the mandate level, though the Hedge Fund and Core Infrastructure mandates have continued to stand out in outperforming their benchmarks. The Secured Income mandate has also done well over the year.

Asset allocation and strategy: The Fund terminated its holdings in Emerging Markets Equity, for which the strategic allocation was distributed between the High Alpha and Sustainable Equity mandates (which still contain emerging markets exposure).

From a strategic perspective, the allocation to Diversified Returns was also reduced, and the global equity mandates correspondingly increased in order to maintain the overall expected return of the portfolio in light of the reduction in emerging markets equities.

Total Fund performance attribution: Equities continue to be the biggest driver of returns and contributed over 70% of returns in the fourth quarter. The only detracting asset from class absolute returns over the period was Equity Protection (due to the rising underlying markets).

Performance vs. expected strategic returns: Returns have been above expectations for all global equity mandates, given the strength of equity markets since 2019.  ...  view the full minutes text for item 44.

The Funding and Risk Management Group (FRMG) is responsible for agreeing the operational aspects relating to the Fund’s risk management framework thereby ensuring that strategic objectives continue to be met. This report informs Panel of issues considered and decisions made by FRMG as well as any recommendations. 

The Investments Manager introduced this report to the Panel and highlighted the following points.

·  Following its last meeting the Panel asked FRMG to consider the quantitative impacts of rising inflation on the Fund’s investment strategy, specifically in relation to the LDI hedge ratio. FRMG examined the impact of different inflation hedge ratios in terms of risk/return, collateral and in the context of the wider investment strategy, noting how the Fund’s already well diversified portfolio is well positioned to mitigate a range of downside risks. FRMG concluded that the Fund should maintain the current inflation hedge ratio while continuing to monitor the inflationary environment.

·  The EPS was restructured in December 2021 to take account of the changes to the underlying equity portfolio that were agreed as part of the wider equity allocation review in September i.e. the removal of the dedicated emerging market equity allocation and the subsequent increase to developed market equities. FRMG considered the post-trade report prepared by Mercer which showed transaction costs for exiting the emerging market exposure came in higher than expected (0.21% of exposure traded vs. 0.14% estimate) as a result of increased volatility at the time of trading.

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel were minded to:

i)  Note the current funding level and LDI hedging position

ii)  Note the impact and performance of the equity protection strategy

iii)   Note the current collateral adequacy position

iv)  Note the current FRMG workstreams as summarised in sections 5-7 of the report.

This report sets out the forward agenda for the Panel for 2022/23. It is provisional as the Panel will respond to issues as they arise and as work is delegated from the Committee. 

The Investments Manager introduced this report to the Panel and explained that reports have been identified for their next four meetings.

The Panel were minded to note the forward agenda as printed.