Agenda item

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 March 2022.

The Investments Manager introduced the report and invited representatives from Brunel and Mercer to present their update.

Daniel Spencer and Luke O’Donnell (Brunel) gave an update as follows:

1.  Credit update: US and UK Government Bond Yields were trending upwards.

2.  Last year there was a supply shortage which caused prices to rise and inflation to increase and the Government Bond Yields adjusted accordingly. 

3.  Corporate borrowing costs had also increased due to the events of the last 3 months. 

4.  Managers and their portfolios: CQS had expertise in loans and asset class criteria, Neuberger Berman had a broad approach and Oaktree had specialist in asset class strength and distinctive asset allocation.

5.  Asset types and return drives: 60%-80% of returns were of moderate risk.  Higher risk assets were low in the portfolio (10%-20%).

6.  Environmental, Social and Governance (ESG) progress of Managers to date were set out in the presentation slides, including key milestones to date in relation to climate issues.  In the shorter term, there would be a full climate audit followed by target setting.

7.  Responsible Investing: Q1 had been impacted by 2 events, the invasion of Ukraine by Russia and subsequent impact on commodities and the continuing lockdown policies of China which was causing bottlenecks in terms of supply.  This had resulted in higher inflation causing central banks to react. 

8.  In Q1 ESG companies had done badly compared with carbon intensive ones so it had been difficult for sustainably focused investors to achieve progress this year due to global events.  Sustainable themed investments were down by 5-6%.

9.  Drivers of market in Q1: Growth and Quality stocks underperformed value and economic/commodity sensitive stocks

10.Current credit themes: Inflation; Covid; global growth uncertainty; rising credit volatility and central bank tightening.

In response to questions, Committee Members were advised:

1.  In relation to responsible investment, the Portfolio Managers were of a high standard and the pipeline of investible opportunities was strong. 

2.  The target for net zero was 2050, but interim targets had been set for 2030 to monitor progress.

3.  In terms of timescales for ESG progress, the long term would be 5-10 years and medium term 2-3 years. It was hoped that the short-term target of a climate audit would be completed this year. 

4.  Neuberger Berman was the leader in terms of RI and may be able to achieve ambitious medium term targets.

5.  Consideration was being given to the impact of commodity production resulting from the Russia/Ukraine situation.

6.  Even though sustainable themed investments were down, there would be no compromise on RI and Managers were looking at different scenarios in the event of the Russia/Ukraine conflict continuing for a long period. 

7.  The result of the Australian election would not impact on investments as this was a small part of the global equity universe.

8.  Even though there were no direct investments in China in this portfolio, the zero covid policy and lockdowns in areas such as Shanghai did have an impact on inflation and market behaviour causing a domino effect.

9.  In relation to the risks and opportunities of stagflation, work was being undertaken in terms of scenario planning and this would be reported back to Panel members. 

The following questions from Panel Members would be raised with Portfolio Managers:

1.  What were the knock-on risks and impact on poorer countries of commodity shortages resulting from the Russian/Ukraine conflict?

2.  What analysis was taking place about the lessons learnt from the Covid pandemic in relation to investment risk? 

Josh Caughey and Steve Turner (Mercer) gave an update as follows:

1.  Market background: key issues were the Russian invasion of Ukraine and the increase in inflation.  This had an impact on the Liability Driven Investment (LDI) portfolio. 

2.  Performance Summary: All global equity mandates were ahead of the assumed strategic returns with the exception of the Paris aligned fund, which has an insufficient track record to be able to draw any conclusions

3.  Property, secured income and infrastructure were all ahead of returns. 

4.  Equity protection had been adding value, equity markets had come down and the funding level was protected by 1-2%. 

5.  The LDI portfolio made a large positive contribution to returns due to the protection it provided against inflation.

In considering whether any issues should be brought to the attention to the Pension Fund Committee, it was noted that the performance of responsible investment and the reasons for this would be highlighted to the committee in the officers’ report.  Officers also advised the Panel of the Government guidance due later in the year in relation to the levelling up agenda and the potential impact for the local government pension scheme.

RESOLVED that the information in the report be noted.