Agenda item

This paper reports on the performance of the individual 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 2024.

The Senior Investment Officer introduced the report to the Panel and summarised the following areas.

·  The Fund’s assets were £5,818m on 31 March 2024 and delivered a net investment return of 2.3% over the quarter which was in line with the benchmark. The increase in the value of Fund assets over the quarter reflected strong equity markets, with Brunel’s listed portfolios all positive on an absolute basis, although flat on a relative basis.

·  The liabilities are estimated to have increased by c.0.6% over the quarter. Taken together with the asset return, the funding level stood at 98% at March-31 (c. £107m deficit).

·  Risk assets began the year as they finished the last with global equities up close to 10% in sterling terms in the first quarter 2024. The US market was the clear leader, while emerging markets and the FTSE All-Share lagged. Gains across all asset classes could largely be attributed to a resilient US economy, rebounding oil prices, and continued positive sentiment around Artificial Intelligence. Expectations of interest rate cuts also boosted equity markets although the pace of cuts is likely to be slower than the market had hoped at the turn of the year as inflation has once again proved stickier than expected.

·  In Brunel’s listed market portfolios, absolute returns were positive reflecting the strength in global equity markets over the period. Global High Alpha returned 9.9%, just 0.1% below the benchmark (MSCI World). Sector attribution showed allocation and selection were neutral overall. The Global Sustainable Equity portfolio returned 9.2%, also 0.1% behind its benchmark (MSCI ACWI). Market sentiment for sustainable investing continued its positive trend that began in Q4 2023 however, over one year to end March 2024, the portfolio remains significantly behind the benchmark.

·  The Diversifying Returns Fund (DRF) returned 4.3% over the quarter, ahead of the benchmark return of 2.0%. Increasing exposure to equities over the six months to quarter end enabled the portfolio to benefit from recent market performance. Multi Asset Credit (MAC) returned 2.2%, which was slightly behind the benchmark return. Credit spreads tightened over the quarter reflecting the improvement in the economic outlook and an increase in risk appetite.

·  During the period £35m was drawn into the new local impact portfolio to finance the acquisition of an operational solar portfolio. A further £40m was drawn into the Fund’s Secured Income portfolio. To facilitate  these large capital calls the Fund used cash and liquidated some of its ETF holdings. Officers redeemed £50m from the Brunel Paris-aligned passive equity portfolio to increase cash at hand and reduce the aggregate overweight position to equities. Post period end the Fund received advance deficit payments totalling £30m.

·  Voting and Engagement Activity: As a responsible investor, we actively endorse collaborative engagement and seek to use our power as a shareholder to encourage corporate change. Voting and engagement are delegated to the Brunel Pension Partnership for the actively managed equity portfolios and to Legal and General Investment Management (LGIM) for the passive portfolios. On significant issues, Brunel may request that their shares held by LGIM are split out and a different vote made.

Shell Plc Shareholder Resolution

·  Shareholder Resolution – Resolution 23 – Filed by: Follow This

·  Shareholders support the company, by advisory note, to align its medium-term emissions reduction targets covering the GHG emissions of the use of its energy products (Scope 3) with the goal of the Paris Climate Agreement.

·  AGM date 21 May 2024.

·  Brunel was one of 27 leading investors that backed this resolution alongside Follow This. The resolution was designed to give Shell a shareholder mandate to drive the energy transition.

·  The co-filing demonstrates Brunel’s commitment to tackling the climate crisis at its source.

·  Outcome: the resolution received 18.6% support from shareholders which was not enough for it to be passed.

·  Dialogue will continue with Brunel over next steps and we expect them to continue speaking with all underlying managers regarding this issue.

The Head of Pensions commented that, although an option, selling out was not always the right thing to do as the power to influence can be lost. He added that officers intend to work with Brunel and other investors to find a way forward.

Steve Turner, Mercer addressed the Panel and highlighted the following areas from their appendices to the report.

Market background

Despite rising bond yields, equity markets continued to rally driven by AI enthusiasm, strong corporate earnings and resilient earnings.

Headline inflation in the UK fell to 3.4% in February from 4% in December. Base effects played a significant part in inflation declining, however, food and energy costs are also declining sharply. The Bank of England maintained interest rates at 5.25%.

Mercer market views

Our medium-term outlook favours growth fixed income and nominal UK government bonds, with a slight overweight to equities (Emerging Market and Japanese equities).

A global economy landing softly, falling inflation and wage growth, resilient consumer and business balance sheets and the ongoing potential for artificial intelligence (AI) should support equity prices in the near term. However, we are conscious that equity valuations are rich and have rallied a lot in recent months.

He informed the Panel that assets were likely to become more expensive, especially in terms of credit spreads. The overall yield on the Multi Asset Credit portfolio was still attractive due to the underlying cash and nominal bond rates. He explained that the actual risk premium on top of this through credit spread is actually quite low.

The Group Manager for Funding, Investment & Risk asked regarding the credit portfolio, are defaults as expected or lower.

Steve Turner replied that the market always tends to over estimate in terms of defaults.

Funding level and risk

The Value-at-Risk increased over the quarter to £1,701m, and to 29% as a percentage of liabilities. Levels have gradually increased since 2020 due to market movements and changes in forward-looking assumptions. For Q1 2024 in particular, VaR has also increased due to the reduction in the coverage of the equity protection strategy (as expected).

Total Fund Performance Attribution – Quarter

The strong returns on Fund assets over the quarter were driven by the Equity portfolio. Multi-Asset portfolios also contributed, whilst the Alternatives did not have much impact.

The Equity Protection Strategy slightly detracted as expected given underlying positive returns from equity markets, although the impact was partly mitigated by the reduction of the coverage from 100% to 50% of the equity portfolio during the quarter.

Total Fund Performance Attribution – 1 Year

Equity was also the main driver of positive returns over the one year period, with Equity Protection slightly offsetting this as expected. Multi-Asset, Infrastructure and Private Debt were also positive, whilst Property and Secured Income were negative.

The Currency Hedge contribution was positive due to the strengthening of Sterling.

The Panel RESOLVED to note the information as set out in the report and its appendices.