80.1 The Committee considered a report providing an update on the investment activities undertaken by the ESPF. The Head of Pensions introduced the report which includes items relating to the investment workplan and implementing the Investment Strategy. Consideration of the Principles for Responsible Investment PRI submission will be deferred until next year as no submissions are possible in 2022 and the Stewardship Code will be reviewed in June or July.
80.2 The Committee’s discussion included the following key issues:
· Market conditions during the quarter were relatively volatile due to the Omicron variant of Covid and the Bank of England raising base rates from 0.1% to 0.25%. Inflation continued to rise with inflation at a ten year high. This may lead to a change in monetary policy in the UK and US to control inflation, which could cause further market volatility. There was a big rotation in markets from a growth style to a value style due to the balance between inflation and growth. UK property saw a strong performance, particularly for operations and logistics.
· The total Fund performance was a 3.6% return against a benchmark of 4.3%. Given the market conditions this is a relatively strong performance. The investment funds Ruffer and Newton performed well as did M&G diversified credit. Some of the other funds performed less well against benchmark (e.g. Longview, Storebrand, Baille Gifford, WHEB and Wellington).
· The Committee discussed the performance of the various fund managers and the Investment Strategy to transition to Osmosis in the light of current performance. The Chair noted it was an unusual quarter and the Fund had not historically underperformed against benchmark. There had been good growth in the Fund over the last five years during a period of low inflation. If there is a UK rise in interest rates the Fund will need to consider the impact of that in the medium term and the best way to address this if there is a move into a changed investment environment.
· The Committee discussed the need to seek the Fund’s equity managers view for the next 12 months and agreed to have a more detailed discussion with Longview about their performance.
· The Fund is overweight to equities and there is a significant overweight to absolute return, which will add to the risk to the Fund due to the macroeconomic outlook and volatility of the markets. This may require there to be some rebalancing of the asset allocation with an increase in infrastructure investments, which has been discussed with officers but not implemented yet. The increase in infrastructure is to be funded from absolute return. Ruffer will perform well in a higher inflation environment, so it may be more prudent to fund the increase in infrastructure from Newton which has a higher correlation with equities.
· The Committee discussed the need to have a rebalancing policy so that Officers can take action to rebalance investments between Pension Committee meetings. The Committee agreed that it was happy to have such a policy to allow Officers to take action, subject to them reporting back to the Committee.
· The Head of Pensions outlined that there is an existing policy, but it lacked clear parameters within which Officers could act. It was agreed that the Investment Working Group would discuss this and a report on a revised rebalancing policy would be brought to the July Committee.
· A request was made at the November 2021 Committee meeting to analyse how the various funds perform relative to one another to aid decisions about rebalancing and responding to a potential period of higher information. This section of the report provides the correlation analysis of how the different funds performed, with a longer time period (e.g. 3 years) providing more meaningful information.
· Overall, the Fund is relatively well diversified and investment in infrastructure will help the stability of the Fund. It was agreed to continue to receive correlation analysis reports and consider them with the annual review of the Investment Strategy.
Investment Strategy recap
· The Committee reviewed the progress in implementing the Investment Strategy which includes actions to increase investment in less liquid assets such as infrastructure and changes to align with the Responsible Investment policy. It was noted that investments in infrastructure can take some time to implement and the ACCESS Pool is in the process of adding a diversified credit fund. Overall, implementation of the Strategy is unlikely to change.
· The Committee asked if the investment in inflation linked property takes into account the need to retrofit property for energy efficiency measures. Investment in long lease commercial and UK residential property offers the most inflation protection. Commercial managers are developing action plans to deal with this, and it will form part of the due diligence process carried out by investment managers. This is less of an issue with residential property which is focussed on the development of new property which incorporates sustainable building standards. Isio are confident that there will not be an impact on infrastructure investments.
· The Head of Pensions outlined that Levelling Up White Paper contains a requirement for LGPS Funds to invest 5% in local infrastructure. This may affect the implementation of this part of the Strategy, but more will be become clear once detailed guidance is issued.
· The Committee asked if the Ukrainian crisis should be reflected in the Investment Strategy. William Bourne, the Independent Adviser to the Pension Committee, advised that it is best not to react too quickly and to wait and see what the impact on markets will be.
Israel/Palestinian Investments (raised under Urgent Items)
· Councillor Tutt outlined that Committee members had been contacted about investments in Israeli companies on the UNHCR banned listed of companies. This is something that was previously raised in April 2021 and asked if it would be possible to have an update report at the next meeting.
· It was outlined that the Local Authority Pension Fund Forum (LAPFF) has been looking at this issue and has met with the Chair of the SAB to look at how LGPS funds could take into account human rights issues. LAPFF is engaging with the 17 companies on the banned list that various LGPS funds are invested in. The ESPF continues to have a small exposure to 6 companies on the list which are mainly international companies with a presence in Israel (e.g. Trip Advisor).
· The Committee agreed to have an update on this issue under the investment report item at the next meeting.
· The Committee considered a report from William Bourne, the Independent Adviser, on the impact of inflation on the Fund’s portfolio of investments. The trend has moved from deflationary to inflationary and the main issue is the role that central banks will play in responding to inflationary pressures. The report looks at four possible inflation scenarios. The Fund is well diversified and has a positive funding position, which will not fall dramatically. The main risk arises from a period of prolonged inflation where the Consumer Price Index (CPI) goes up and the liabilities of the Fund increase.
· The main recommendation is not to do too much too soon and to have a full review of the Investment Strategy in July. Index linked Gilts offer protection against inflation but provide a poor return. Two actions to consider are:
o Delay the decision to reduce investments in index linked gilts and diversified growth funds.
o Increase investment in diversified growth funds.
· The Committee discussed the possible responses to the scenarios presented in the report. Isio outlined their agreement with the analysis that is presented in the report. The Chair outlined three possible ways the Fund could deal with inflation through increased investment in infrastructure, total return funds and investment in an inflation overlay product for the tail liability of the Fund.
· The Committee agreed consideration of the inflation report would be undertaken by the Investment Working Group and it will bring back any recommended actions to the Committee.
ACCESS Pool update
· The Committee agreed to nominate Cllr Paul Redstone to the Governance Committee as the substitute ESPF member on the ACCESS Pool Joint Committee.
External Assurance reports update
· The Pool receives external assurance reports from fund managers and a concern has been raised with the UBS external assurance report. This is being reported to the Committee so that it is aware, but no action is needed at this point in time.
Department for Levelling Up, Housing and Communities announcement
· The Levelling Up White Paper is introducing a requirement for LGPS funds to invest 5% which is equivalent to £16 billion in local infrastructure. It has been clarified that in this context ‘local’ means within the UK. The ESPF’s plans to invest in infrastructure might meet this requirement but the Fund will need to see the detailed guidance which is expected to be published sometime in the summer.
· The Committee discussed the proposal to write a letter to call on the UK Government to become a core member of the Beyond Oil and Gas Alliance (BOGA). It was noted that there is no published Government response to this issue at present. Policy engagement is part of stewardship responsibilities, and this is usually done through LAPFF and the Institutional Investors Group on Climate Change (IIGCC) which the Fund is a member.
· Some Committee members commented that calling on the Government to join BOGA is consistent with the Fund’s membership of the Climate Action 100 initiative and Responsible Investment initiatives. Other Committee members argued that political campaigning or lobbying is outside the remit of the Committee, whose primary function is the fiduciary duty to the Fund’s beneficiaries and the Fund should not be used as a vehicle for lobbying.
· It was agreed that the Head of Pensions would write to the IIGCC to seek their views and direction of travel on this issue.
80.3 The Committee RESOLVED to:
1) Note the Investment Workplan (appendix 1);
2) Note the Quarterly Investment Report from the Investment Advisor, Isio (appendix 2);
3) Note the Investment Correlation report (appendix 3);
4) Note the investment strategy recap (appendix 4);
5) Note the Inflation Report (appendix 5) and agreed that the Investment Working Group will examine this issue and report back to the Committee;
6) Note the ACCESS update and approve the nomination of Councillor Paul Redstone as a substitute representative of the County Council at the ACCESS Joint committee meetings;
7) Note the update on the external assurance reports;
8) Note the update on the announcement by the Department of Levelling Up, Housing
9) Agree to write to the IIGCC for their views on policy regarding the Beyond Oil and Gas Alliance; and
10) Agree to have a detailed look Longview’s performance and to get update from WHEB and Wellington as to how their impact funds are going to perform in a volatile environment.