Agenda item

INVESTMENT STRATEGY AND BRUNEL UPDATE (for periods ending 30 September 2022)

This paper reports on the investment performance of the Fund and seeks to update the Committee on routine strategic aspects of the Fund’s investments and funding level, policy and operational aspects of the Fund.


The Group Manager for Funding, Investment & Risk introduced the report to the Committee. She informed them that the FRMG had decided to retain the current decision to suspend the trigger framework with interest rate hedge ratio and inflation hedge at c. 40%.


She said that the outline of the forthcoming Strategic Investment Review had been discussed at the recent Investment Panel meeting and that background papers relating to it would be circulated ahead of the workshop to be held on 28th February. She added that a wider stakeholder consultation was planned to take place in February for Members, Employers and Councillors.


She informed the Committee that the Fund had been nominated for the Best Climate Change Strategy award as part of the LAPF Investment Awards 2022 and thanked the Investments Manager and Senior Investment Officer for their work involved in the award.


Nick Page, Mercer addressed the Committee and highlighted points from within Appendix 3 - Mercer Quarterly Investment Performance Report.


Market Background


·  There was turmoil in UK gilt markets around the end of the quarter, as markets positioned for the Bank of England having to double down on tightening, in order to offset the expansionary mini budget. Soaring yields led to significant disinvestment of liquid assets in order to bolster collateral levels for funds using leveraged hedging strategies.

·  Risk assets rose in July on the back of hopes of inflation peaking and the hiking cycle ending, but these hopes were squashed later in the quarter. Furthermore, markets priced in the increasing risk of a recession.


Mercer market views


·  Our medium term outlook (as at October 2022) is mixed given the big cross in current markets.

·  Several factors give rise to a negative backdrop to risk markets, however valuations are more attractive, sentiment is soft and the Fed might start to curtail monetary tightening.


Total Fund performance attribution – 1 year


·  The negative returns from equities, LDI and currency hedging drove negative performance over the one year period.

·  The alternative investments and Equity Protection Strategy cushioned losses.


The funding level has held up strongly despite the negative asset returns, significant headwinds and volatility.


Pauline Gordon asked if further information could be added to the chart on page 56 to show how liabilities have moved versus the LDI.


Nick Page replied that they could look to add this into the next reporting cycle.


William Liew commented that he felt the drop in funding level was quite significant given that it equated to around £675m.


Nick Page replied that the 89% stated in the Executive Summary is based on the previous actuarial valuation assumption. He added that if you allow for the updated actuarial valuation assumption to March 2022 and also allow for changes in market conditions from March to September 2022 then the actual funding level is now around 98%.


The Group Manager for Funding, Investment & Risk asked when will the 2022 valuation basis be allowed to be used.


Nick Page replied that it could be used once agreed and signed off. He added he felt that this had already taken place.


The Group Manager for Funding, Investment & Risk said that she would contact the Actuarial team to confirm.


The Committee, having been satisfied that the public interest would be better served by not disclosing relevant information, PROPOSES, 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 Committee returned to public session for further questions.


Councillor John Cato referred to Appendix 2 - Investment Strategy Dashboard and asked at what point would the funding level need to reach to go red.


The Group Manager for Funding, Investment & Risk replied that big swings can happen in short periods of time. She added that for her the main issue would be when the deficit reaches a certain percentage of our assets, overall liabilities. She said that this is a particular problem within the valuation year.


Councillor Cato asked for confirmation that the detail of what comprises the Brunel portfolio is delegated to them.


The Group Manager for Funding, Investment & Risk replied that yes it was.


Councillor Cato asked how much overlap of assets was there within the equity funds and could some comments be added as to the ESG criteria for the asset classes / portfolios listed.


The Group Manager for Funding, Investment & Risk replied that the monitoring role for the portfolios is taken up by the Investment Panel. She added that there was likely to be a high overlap between the three equity portfolios. She said that for the Passive Global Equity Paris Aligned there would also be some overlap.


She explained that for Global Sustainable Equity there are four managers and that Brunel will allocate to those managers that have less of an overlap. She stated that overall there was quite a lot of diversification and low degree of overlap aside from the core equity funds mentioned.


The Committee RESOLVED to:


i)  Note the information set out in the report and appendices.

ii)  Note the outline and timetable for the Strategic Investment Review


Supporting documents: