Agenda item

6.1       The Committee considered a report providing an update on the investment activities undertaken by the East Sussex Pension Fund (ESPF or the Fund).

6.2       The Committee’s discussion included the following key issues:

• Despite the impact of COVID-19, Isio, the Fund’s investment advisor, advised that it is important to retain a diversified portfolio containing exposure to various property types, particularly as businesses begin to pay back rent arrears accrued during the pandemic lockdowns, which commercial property managers agreed to at the time. It is not always easy to change the weighting of the holdings from one property type to the other, however, Schroders, the asset manager for the Fund’s property portfolio, is a fund of fund managers, which enables it to be somewhat flexible in how it balances its property portfolio to where it sees maximum returns. Retail is currently the most volatile property type, but Schroders has only around 20% exposure to retail, which Isio is not concerned about.
• Whilst it is a valid concern that the cost of refitting buildings to meet climate emission goals could be a risk to the Fund’s property assets in the coming years, the majority of returns achieved by Schroder are through rental income rather than through capital appreciation, which is less exposed to the effect of building costs. Schroders, however, could be asked its views on the matter.  In addition, Schroders is outside the ACCESS pool and ACCESS is currently looking at illiquid assets, however, it will be 2-3 years before any illiquid pool will be established and the exit costs for property are high. It would therefore be unadvisable to divest from property until it is clear what, if any, alternative ACCESS was offering.  ACCESS is in the process of tendering a consultant to do this work.
• There were considerable discrepancies between the two sources of performance for the ATLAS Infrastructure Fund – those from the fund managers themselves and those produced by the Fund’s custodian, Northern Trust – Isio has asked Northern Trust to investigate further, as their figures appeared accurate. This is not uncommon occurrence as performance figures are always a snapshot in time and can change daily due to events like cash flow movements.
• The Fund’s equity portfolio has a slight bias towards growth stocks against value stocks, however, growth stocks have outperformed value stocks over the past few years due to the low interest rates, which encourage investment in assets that will give higher future returns compared to dividend payments. This is likely to continue until interest rates change. The Fund has value stock exposure through Longview, which tilts towards value stocks over growth stocks.
• The snapshot of the Fund’s exposure to fossil fuels seen in the quarter 1 report is backwards looking and includes the UBS funds that the Committee agreed to divest from at the last meeting. These funds will fall out in future reporting and fossil fuel exposure will be reduced considerably as a consequence. Isio will present a report on the investment managers’ approach to Environmental, Social and Governance (ESG) issues, including fossil fuel exposure, at the next Committee meeting.

6.3       The Committee RESOLVED to:

1) note the Action Log and Investment Workplan (appendix 1);

2) note the Quarterly Investment Report from the Investment Advisor, Isio (appendix2);

3) receive Fixed Income training (appendix 3);

4) note the Fixed Income Review of Current Holdings (appendix 4);

5) note the ACCESS Pool update;

6) note the high level carbon foot printing and energy transition scores for the Fund’s managers.