Minutes:
At the last meeting Hymans Robertson presented their findings and conclusions as to the review of the Fund’s current Investment Strategy. The review considered the scope to improve the chances of achieving the Fund’s primary objective and the risk return profile of the Fund’s investments, optimising diversification benefits where possible, whilst being mindful of contribution rate affordability and income requirements.
Having regard to the Member responses to a previously circulated investment beliefs questionnaire a series of recommendations were presented and agreed on changes to the asset allocation and mandate structure for the Fund’s future investment arrangements. It was agreed that a further report and a presentation from Hymans Robertson would come before this meeting outlining how the changes would be implemented.
The Investment Fund Manager (IFM) introduced the item and by way of context provided the Committee with the background to the Fund’s performance including summary details of the full restructure that took place in 2012 to address previous years of underperformance. The main driver for change at that time being to provide the Fund with more protection from underperforming managers, through diversification and passive investment, whilst seeking to ensure a return sufficient to close the funding gap.
Overall, the restructure and revised investment strategy performed well although there remained areas of under-performance and which led to the current high-level strategy and structure review by Hymans Robertson.
Looking at the performance of the Fund over the past year up until April 2020 there have been no real issues of concern, however since that time Equities investments have had a strong rally with the relevant Fund Manager significantly outperforming, to the extent that the Equity position within the Fund is now ‘overweight’, meaning it is exceeding the current strategic allocation of 48% and the boundaries within that allocation, and therefore requires an urgent review.
Given the need to provide the Committee with more training ahead of consideration of further strategic asset allocations within the Fund, the IFM would ideally wish to avoid the need to have to make decisions on selling assets now only to potentially have to buy back later and incur fees. Instead, he would recommend amending the strategy control range to accommodate the large movement in Equities in the Fund until such time as Hymans Robertson complete their review and present a further report to the Committee in June, with recommendations for changes.
The Committee then received a presentation from Nick Jellema, Senior Investment Consultant at Hymans Robertson on an update on the Investment Strategy and Structure Review. He commented that the Fund was in a strong position although there were small strategic refinements that could be made to help and support the underpinning of the returns. The executive summary and recommended courses of action covered two areas, namely Strategy, and Structure and Implementation, the latter proposing both courses of immediate as well as mid-term actions. The presentation also covered the analysis and testing of the proposed v current Investment Strategy using Hymans Robertson strategic framework model to produce predicted rates of return and recommended next steps.
In response to the presentation a question arose about Multi-Asset Credit (MAC) and concerns that this amounted to the type of sub-prime investment that led to the collapse of the banks in 2008. Members were assured that there was very little overlap in the MAC’s of the types of property investment which caused the financial crash over a decade ago. There was however support for the proposal to focus property investment more in the residential than commercial market given the volatility of the latter at this present time.
In the light of the presentation and having regard to the recommendations in the covering report from the IFM,
The Committee noted:
(i) The Investment Strategy and Structure Review proposals put forward by Hymans Robertson, and
(ii) the performance of the Fund since 2015 and up to 7 December 2020.
Furthermore, the Committee agreed to:
(iii) The proposed revised asset allocation and the strategy control ranges provided in table 5 in section 3.6 of the report,
(iv) Invest a further £20m in Private Equity with Aberdeen Standard, to be funded from the pre-payment of £20m that will be paid to the Fund on 1 April 2021, with the initial investment of £10m to be made in January 2021 and a further £10m invested in April 2021,
(v) Remove the current investment management agreement restriction with Aberdeen Standard that requires less than 50% of the Portfolio to be invested in permitted investment funds which offer redemptions within 365 days (including notice period) to accommodate the increase in Private Equity,
(vi) The proposed approach, outlined in the report, of Members receiving training on both the proposed asset class to be invested in but also the impact of reducing the asset allocation to current investments, prior to any investment decision being made, and in doing so,
(vii) Attend training on the proposed strategic asset allocation changes on the following dates (to be confirmed):
January 2021: ESG and Value equity investments
February 2021: Private debt and Diversified Growth Funds
March 2021: Multi-asset Credit and Fixed Income (LCIV)
April 2021: Property Investments, and
(viii) Receive further reports to agree any asset allocation decisions after each training session.