Agenda item

Kenneth Ettles and Nick Conroy from Aon introduced the report and provided an overview of key information, some of which is outlined below.

·         It was reported that the Fund had returned 1.8% over the quarter, equivalent to an annualised return of 7.2%, which was above the discount rate. Positive absolute performance was noted across all periods, although there had been underperformance relative to the benchmark over one, three and five years. Over the longer term, performance was broadly in line with the benchmark.

·         The portfolios that had underperformed relative to the benchmark were highlighted. It was noted that officers spent considerable time reviewing relative performance including through engaging with managers. It was reported that property managers had performed well, with both portfolios outperforming their benchmarks.

·         It was noted that growth stocks, which had been performing strongly, had underperformed value stocks globally during the quarter. This resulted in poor performance of the Fund’s equities investments.

·         Within the Border to Coast portfolios, most active managers had underperformed their respective peer groups, with both growth and value managers lagging behind their peers.

·         The Fund had been 1.5% behind benchmark overall for the quarter, but with a positive absolute return. Due to the strong absolute performance, the funding level was estimated to have improved to around 123%, an increase of approximately 3% since the valuation date.

·         It was reported that the cumulative return on the portfolio since the valuation date had been 8.8%, which remained well above the discount rate.

·         It was noted that some rebalancing had taken place, with assets moved from the Baillie Gifford Global Equities portfolio into the Border to Coast Index Linked Bond Fund. This transition had proved beneficial, as index linked gilts had outperformed the Baillie Gifford fund by approximately 13% over the quarter. It was highlighted that the most significant driver of overall returns was the Committee’s decision on the strategic asset allocation.

·         The expected long-term return on the portfolio at the end of December was 7.2% per annum, which remained well above the actuarial discount rate of 4.25%. The difference represented the margin for prudence built into the actuary’s investment return assumption.

·         It was reported that fixed income assets had delivered positive returns; however, credit spreads were at historically low levels – around 0.8% on investment grade credit. Aon noted that they would welcome consideration of this within the Border to Coast credit portfolios, and potentially an adjustment to reflect valuations in credit markets.

·         It was reported that the value of the Fund had reached £5.1 billion, the highest level recorded.

·         The current value at risk measure was noted to be approximately £940 million, broadly equivalent to the size of the Fund’s surplus. It was also noted that the Fund had not previously reached a surplus of this level, having been in deficit for many years, and that this provided a strong cushion.

·         It was advised that the five year performance figures incorporated  the market effects of part of the COVID 19 period, and not the whole COVID-19 related cycle. Therefore, the three year and longer term numbers were considered more indicative of underlying performance.

In discussion, the following points were made:

·         It was asked whether recent performance indicated that the Fund’s equity approach needed to be reconsidered. In response, it was noted that the reduction in equities at the last strategy review had been appropriate and that the current allocation remained suitable. The next formal review of allocations was planned for 2028/29. It was explained that while passive equity investment was an option, the Fund had previously chosen active management aiming to add value over benchmarks. It was noted that the equity allocation would continue to require close monitoring.

·         A question was asked about the Fund’s approach to investing in UK infrastructure and what an appropriate level of allocation might be. The Fund’s allocation to infrastructure was noted to be 15% of total assets. It was reported that investment in infrastructure was regarded as positive, with significant global investment expected over the coming decades. A global approach was generally preferred, as limiting investment to UK projects could restrict opportunities, although the benefits of domestic investment and the Government’s encouragement for UK pension funds to invest in UK assets were acknowledged. It was clarified that of the 15% overall allocation, 10% was invested in global infrastructure, 4% in global climate related opportunities, and 1% in UK opportunities.

·         Clarification was sought regarding the climate opportunities and UK opportunities allocations. It was confirmed that the actual allocations at the end of December were approximately 2% and 0.2% respectively, while the strategy set targets of 4% for climate opportunities and 1% for UK opportunities. It was explained that both funds were relatively new products and that, although commitments had been made, the allocations would take time to build up. For example, it was noted that the climate opportunities allocation was a recent addition and was expected to take five to seven years to go from zero to the 4% target.

Resolved

That the Committee notes the report.