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 December 2024.

The Senior Investments Officer introduced the report to the Panel and highlighted the following points.

·  The Fund’s assets were £5,899m on 31 December 2024 and delivered a net investment return of -1.8% over the quarter, lagging the 3.0% return for the strategic benchmark.

·  Currency hedging had a negative impact on overall returns given the strong movements in currencies during the quarter.

·  The estimated funding level stood at 106% as of 31 December 2024 (c. £284m surplus).

·  Returns from Brunel’s listed portfolios were positive with some notable double-digit performances from Global High Alpha, Global Sustainable Equities and the Passive Developed Equities Paris Aligned portfolios, however relative returns were in line with or behind benchmark.

·  Brunel’s listed market portfolios all recorded positive absolute performances, but in a familiar theme to previous quarters, relative performance was held back due to stock selection and the continued dominance of the US technology stocks.

·  During the period the Fund rebalanced its equity overweight down by 5% bringing the overall equity allocation down to c. 45%, which is within the rebalancing range set out in the Investment Strategy Statement. Due to equity market gains post quarter-end the Fund’s allocation to equities has drifted above the upper bound of its rebalancing range. Officers will rebalance the portfolio accordingly and update Panel at its next meeting.

The Investments Manager addressed the Panel to provide them with a Local Impact update.

·  During the quarter, £4m was drawn down from the Fund’s commitment to Wessex Gardens. Capital will be used to fund a solar construction asset in Oxfordshire. This takes capital deployed to £40m of a total figure of £50m committed.

·  The Fund received its first capital call from the Octopus Affordable Housing Fund. £5m in capital to be used for completion and handover of three separate Affordable Housing schemes in Exeter, Essex and the South-East of England.

·  SME Funding – The Fund agreed a commitment of £50m to an SME funding strategy following consultation with Mercer. Completion of the manager appointment and legal review expected over the next quarter. The Fund has negotiated a significant discount to the prospective managers standard fee terms.

Councillor Crossley asked if investment was also planned for wind turbines, as whilst acknowledging the benefits of solar panels they do result in a loss of land which could be used for food production.

The Investments Manager replied that the Wessex Gardens vehicle is predominantly land based solar. He added that through other infrastructure allocations they do have investment in wind turbines alongside other renewables.

The Head of Pensions added that having visited one of the sites he was aware that discussions had taken place for potential new solar panels to be slightly elevated to allow for sheep to graze the land. He said that he could not say for definite at this point whether that design would be in place for the site mentioned.

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

·  Q4 was an unusual period in which the US Dollar, nominal gilt yields, inflation and equities all increased, whilst Sterling weakened. As a result, the currency hedging, LDI and equity protection strategies all contributed to relative underperformance, as well as underlying portfolios underperforming within their own markets.

·  Based on a high level analysis, the underperformance over Q4 can be attributed to: Around half due to currency hedging and LDI (approximately equal contribution from each portfolio) due to the market dynamics outlined above. As LDI performance was negative in Q4 due to gilt yield movements, and the % allocation to LDI was above the SAA, this has had an unusually large impact on total performance. As at the time of writing, gilt yields have reverted to their levels prior to the October 2024 Budget, so we expect most of this underperformance to have reversed.

·  State Street don’t take currency hedging into account when calculating the total Fund benchmark. Mercer and Fund officers are due to discuss this issue further with them in due course.

·  Around a quarter of underperformance was due to negative relative returns from Brunel’s funds, in particular the active equity strategies.

·  Focus required on how Brunel continue to manage their portfolios and what, if any improvements can be made.

·  Upcoming Investment Strategy Review – Consider further exposure to passive management.

·  The remainder was due to negative relative returns from other portfolios. We would highlight the Partners Group overseas property mandate in particular (-34% -v- benchmark). These are illiquid, private market assets that are in run-off, with a high absolute benchmark return, so meaningful performance reporting for these assets is not straight-forward. Could consider exclusion from overall benchmark returns when the valuation of this mandate falls below 1% of total assets.

·  The LDI portfolio and underperformance of the active equity mandates were also key drivers of the negative relative return against the strategic benchmark over the one year period, as well as the Equity Protection Strategy.

The Chair asked if a timeline for discussions with State Street and any possible changes to the benchmark had been put in place.

Steve Turner replied that he was hopeful that these issues could be resolved by Q1.

The Group Manager for Funding, Investment & Risk added that it would be important for this to be resolved ahead of any potential new pooling arrangements.

The Head of Pensions said that he was not worried about the performance quirk over these three months, but it was important to understand what the underlying drag of the Risk Management Strategy is and whether they are comfortable accepting that drag in exchange for the insurance policy it provides.

He added that in terms of equities, the persistent underperformance of Brunel is mainly due to their underweight to the large technology stocks and that the question to answer was whether now was the correct time to change that stance or not.

John Finch commented that the Brunel portfolio performance was partly a result of our climate change views and the main reasons for their underperformance and said that this could continue to be a problem given the rollback within the USA of the climate change agenda.

Steve Turner agreed and said that they were considering that as a factor to be monitored over the coming months. He posed an open question to Brunel on what the non-financial reasons were for investing in Sustainable Equities and what were the deliverables of these investments.

The Group Manager for Funding, Investment & Risk said that it would be interesting to monitor going forward what companies within the USA continue to report or disclose in terms of ESG.

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