Agenda item

Investment Performance

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.

 

Minutes:

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 a marked reduction of the overall level of the VaR.

 

Total Fund performance

 

Fund returns over the quarter were driven by the rise in the value of the LDI

portfolio as it protected against inflation increases. The equity portfolio also

continued to deliver returns, and the currency hedging policy made a positive

contribution as sterling strengthened.

 

The equity portfolio underperformed relative to the benchmark, however. In

particular the Sustainable Equities fund has struggled due to its strong bias

away from “value” factors, which have done well over the last few months. The

equity protection also detracted from relative performance at the total Fund

level. Falls in the MAC and Renewable Infrastructure mandates meant they also

underperformed their cash/inflation plus benchmarks.

 

Relative performance at the mandate level has been stronger over the one year

period to 31 March 2021, with the High Alpha Equity, Fund of Hedge Funds and

MAC mandates standing out. Underperformance relative to the strategic

benchmark over this period is mainly due to the impact of the equity protection

strategy, but it is important to note that this has behaved in line with

expectations given the increase in the underlying equity markets.

 

The Panel thanked Steve Turner and Joshua Caughey for attending and noted the report.

 

Supporting documents: