Issue - meetings

62.1.    The Committee considered a report providing an update on the investment activities undertaken by the ESPF.

62.2.    The Committee’s discussion included the following key issues: 

·         WHEB has a more concentrated portfolio of stocks than Wellington so is more volatile and susceptible to rises and falls in the market. Similarly, Baillie Gifford has fewer than 100 stocks so is expected to be more volatile than the UBS fund that it is replacing.  

·         There is limited value in the performance measure “since inception”. The meaning of the term is not clear, i.e., does it mean since the investment manager was founded or when ESPF decided to invest with them; and it makes comparisons difficult, as some investment managers have been with the Fund far longer than others.

·         Equities have performed well for the Fund for several years now, but the future is not looking as promising. Inflation is increasing on a sustained level above 3% and, in response, there are clearly signs of governments and central banks beginning to plan to enact monetary policies that will restrict the flow of money supply through raising interest rates, which will make equities a less attractive asset class and could also cause a recession if enacted too soon, further reducing equity’s value. Whilst the UK and other countries do now seem to be in a period of inflation it may not be a long-term issue, as it appears the inflation is supply-led rather than demand-led. It could, however, become self-replicating should people begin demanding pay rises to meet the rising costs of inflation.

·         Whilst 40% of the Fund’s value is in equities, there are a number of other asset classes in the overall portfolio of the Fund that are designed to protect against inflation. Private equity and credit will do better than equity; private equity is less volatile than the listed market as performance is reported on a quarterly basis that smooths out fluctuations in value. Private equity managers are also well placed in this scenario to fund poorly performing companies struggling from the effect of inflation, which will benefit them as the companies recover. Infrastructure and property are designed to protect against inflation as they track inflation quite closely and infrastructure provides an attractive return on investment. Ruffer’s diversified growth fund is also designed to offer inflation protection via its choice of asset universe. Finally, in terms of equities themselves, value equities offer more resilience than growth equities, and the Fund has exposure to the former through its investments held by Longview.

·         The Fund is currently overweight in equities to its strategic asset allocation due to strategic changes still to be implemented such as global open-ended infrastructure and inflation linked property, although suitable managers have not yet been identified. Isio will investigate further and produce a future report on possible infrastructure managers, as infrastructure remains outside of ACCESS and the time frames associated with this asset class being available through the pool impact the Funds strategy implementation. Increasing the Fund’s exposure to inflation  ...  view the full minutes text for item 62