Agenda item

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, notable Responsible Investment developments and operational aspects of the Fund.

The Investments Manager introduced the report to the Committee.

Local Impact Portfolio

He explained that the Fund is seeking to appoint an SME funding manager to complete the core local impact portfolio.

He stated that the SME strand of the portfolio will seek to stimulate local economic growth through business innovation and the creation of local jobs. The appointed manager will focus on private equity style investments in local SMEs with established business models and attractive growth potential.

He said that ‘Local’ in respect of this fund is defined as the Brunel catchment area of Avon, Somerset, Wiltshire, Cornwall, Dorset, Devon, Gloucestershire and Oxfordshire, with some limited ‘out of county’ exposure to be expected.

He explained that the Committee are being asked to note the decision of the Investment Panel to appoint Foresight as the Fund’s Local Impact SME Funding Manager, subject to further due diligence, independent suitability, tax and legal advice.

He added that the final decision to appoint Foresight and the size of the allocation will be agreed by the Head of Pensions under delegated authority and in consultation with Mercer.

Natural Capital

He informed the Committee that Mercer have provided the Investment Panel with an overview of the investment case and implementation options for a dedicated Natural Capital allocation.  He added that the analysis shared with the Panel indicates an initial 2% of assets (c. £120m) would be a reasonable initial allocation.

He said that the Panel agreed that any investment in Natural Capital represents an opportunity to show leadership within the LGPS and there is a clear desire to invest in both established forms of natural capital such as sustainable forestry and agriculture as well as more nascent strategies such as wetland and coastal restoration.

He explained that the Panel will make a recommendation to the Committee in the first half of 2025 once the Brunel portfolio specification has been finalised. He added that this would ensure the views of the Panel are fed directly into the Brunel portfolio development process and the Committee can gain assurance that the Brunel portfolio delivers on the Fund’s requirements, prior to making a commitment.

Councillor Fi Hance referred to the Local Impact Portfolio and commented that she felt that this was good news. She asked if press releases on this subject could be shared with the Committee.

The Head of Pensions replied that he would ask for these and a video relating to the Investment Strategy to be shared with the Committee.

Nick Page, Mercer addressed the Committee and highlighted the following points to them.

•  The Fund’s assets were £6,034m on 30 September 2024 and delivered a net investment return of 3.5% over the quarter which was 2.2% ahead of its strategic benchmark.

• Over 1 year to the end of September the Fund returned 14.8% in absolute terms and +2.7% in relative terms.

• Outperformance relative to the strategic benchmark over the one-year period was due to the Synthetic Equity, Liquid Growth portfolio, Renewable Infrastructure and Private Debt, as well as the Currency Hedge adding to returns. The overweight position to Equity has also been beneficial during a period of strongly rising markets.

• The drivers of underperformance (-3.9%) over the three year period were the active equity, Equity Protection, Overseas Property and Secured Income mandates.

• The funding level is estimated to have increased over the quarter to c.104% as the value of the assets increased by more than the estimated present value of the liabilities. This is a strong position ahead of the next valuation.

Nick Weaver said that there was a need to understand the underperformance over the three years and that it could equate to around £500m. He asked how much of this figure was attributable to Brunel.

Nick Page acknowledged that Brunel have struggled over the three year period and said it should be looked at as to how they are performing against their peers.

The Group Manager for Funding, Investment & Risk added that Brunel do monitor their performance against their peers for each of the portfolios, but don’t report on that basis. She said that all managers with a similar tilt would potentially be behind the index and that a significant amount of the underperformance could not be attributed to Brunel.

The Head of Pensions commented that improvements and progression over that past year were encouraging and also cited the strategic underweight to the ‘Magnificent 7’ stocks as a factor. He said that at this stage he felt Brunel were correct in maintaining this position.

Charles Gerrish referred to Partners Overseas Property and its poor performance and asked if this was a legacy portfolio that was winding down.

The Group Manager for Funding, Investment & Risk replied that it was and that it had been hit fairly badly by property markets in the far east, in particular China. She added that the figure involved was around £90m - £100m.

Councillor Toby Simon said that it was difficult to know what to do with regard to the ‘Magnificent 7’. He added that it would be helpful if the Committee could be informed of the key factors that have improved the investment performance over the past three months.

The Investments Manager replied that officers were working on such information to share with the Investment Panel and so would include the Committee in the circulation when the work has been completed.

The Committee RESOLVED to:

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

ii)  Note the decision made by the Investment Panel to appoint Foresight Group as the Fund’s Local Impact SME Funding Manager, subject to further due diligence, suitability, tax and legal advice.