Agenda item

The Investment Fund Manager presented a report on the Fund’s performance during the period 1 October to 31 December 2023 (Quarter 4). The Committee also received a verbal update on the unaudited performance of the Fund up to March 2024, an update on the Fund’s Investment Strategy and performance, as well as commentary on the market background for the past quarter from the Committee’s Independent Advisor, together with input from David Walker, Hymans Robertson (HR) who provided an overview and analysis of the latest market position. 

In response to the presentation and specifically in the light of today’s inflation figures sitting at 3.4%, and with the likelihood of further sharp falls, particular the light of the reduction in energy prices, HR were asked to speculate about the headline inflation rate over the coming Summer. Reference was also made to the cooling of the property market and specifically in the light of the pandemic, the slump that occurred in the demand for office space with increasing numbers of people working from home, and more recently the talk of permitted development rights for offices to be converted to residential to provide more supply. Consequently, what was the view as to the office environment in the next few years.

Mr Walker responded that the expectation was that inflation would over the period probably reduce a little further towards the Bank of England 2% target, but that due to the labour market and wage rises along with continuing core inflationary pressures particularly in the service sector, there would not be any dramatic movement. In terms of the property market, some of the structural issues seen were beginning to occur prior to Covid, albeit the pandemic accelerated the problem with moves towards online retail and a subsequent reduction in the need for some industrial warehousing. Turning specifically to office space there was still a demand, with a lot of companies reviewing their policies with moves towards staff coming into the office a set number of days a week. The issue was also location dependent with prime areas such as the south and London still seeing a high demand with rental values remaining strong compared to more outlying areas. The other factor is the energy performance of the buildings where those of a high quality can still demand higher rents. 

The Investment Fund Manager continued his report on the overall performance of the Fund over the quarter and that of individual Fund Managers over both one year and three years, in addition to which he provided a verbal update as of 19 March 2024, summarised in a paper circulated at the meeting. It was noted that the reference in the paper to the performance of Aberdeen Standard was incorrect and should be disregarded for the purposes of performance. 

A number of questions arose from the report which the Investment Fund Manager responded to as follows:

What were the reasons for making a short-term loan of £14.5m to the Council

This was due to the Council’s better Treasurer set up for the purposes of maximising investments in the money markets. The current return on that cash investment was around 5.2-5.3%

Were there any significant concerns seeing the underperformance of a number of Fund Managers in the last quarter against the benchmark?

Investment strategies were designed to be diverse and would by their nature always generate under and over performance, hence for investment purposes it was necessary to take the long-term view. That said it was planned to review some of the benchmarks, not to make it easier for Managers to achieve, but to make benchmarks more realistic, given that some have proved particularly challenging during periods of high inflation.

Was it intended to re-evaluate the Investment Strategy seeing it was slightly overweight in favour of equities?

Overall equities tend to outperform all other asset classes and reach the point at which there is either a correction, or they move outside the acceptable range, when then a report comes back to Members to take corrective action. 

Given the overall increased value of the Fund and seeing the next planned 3-year Fund Valuation was due in March 2025, what was the view as to the expected Employer Contribution rates for the next three years?

If the Council was under pressure it could be that it would look to reduce the employer rate, however notwithstanding that scenario, the view of officers and Hymans Robertson was it would unlikely reduce (if at all) by too much seeing the significant pension increases over the past two years due to the high levels of inflation which puts more pressure on assets to perform to maintain the Fund’s levels which had dipped but more recently bounced back quite strongly. 

Were there any concerns as to officers growing indirect relationship with Fund Managers due to the increasing involvement of the London CIV in the selection and monitoring of Investment Managers? 

There could be a bigger disconnect with Fund Managers’, but it will be a long process seeing we only have a few Funds invested with the London CIV, and therefore officers maintain good working relationships with most Managers. 

The Committee noted:

(i)  The progress on the strategy development within the Pension Fund,

(ii)  The daily value movements of the Fund’s assets and liabilities outlined in Appendix 1 to the report, and

(iii)  The quarterly performance of pension funds collectively and of Fund Managers individually.