Agenda item

66.1     The Committee considered a report introduced by Russell Wood drew the Committees attention to the following points:

PRI

1)    The Summary Scorecard gives an overview of the Fund’s scores against the PRI median score. The Scorecard is shown below and indicates that there are still areas where the Fund can improve but that it is currently performing above the median PRI score on all areas. One item which couldn’t be completed but this will be resolved for next year’s submission.

Stewardship Report

2)    The Fund is pleased to confirm that it has maintained its status as a UK stewardship code signatory. The Stewardship report is now on our website along with notification that the Fund are still signatories.

CMA

3)    With the introduction of the new Investment Consultancy contract with Hymans Robertson, the Pension Committee are asked to review and approve the strategic objectives that have been set for Hymans Robertson under their new contract which are set out at Appendix 4 of the report.

Scheme Advisory Board

4)    Counsel Opinion was sought in on the implications of the current events in Gaza on LGPS, the opinion sets out that there is no potential prosecution that can be made with regard to the Fund’s investments.

5)    The SAB has now received Nigel Griffin KC’s updated opinion on the fiduciary duty in the context of the LGPS, there have not been any changes in respect of what has been published so far in respect of the reforms.

66.2        Iain Campbell (IC) drew the Committees attention to the following points:

1)    The Committee welcomed the new format and noted that Hymans are happy to tailor the report as required.

2)    Since the last reported position, the valuation of the Fund has increased from £4.917bn as at 30 September 2024 to £5.070bn as at 31 December 2024 (an increase of£95m). This performance reflects a positive absolute return of 2.0% in the quarter to December 2024. The Fund, however, underperformed the benchmark in the period by 1.6%.

3)    Performance of Fund assets is similarly behind benchmark over longer time periods. Over the past 12 months and 3 years the Fund has relative returns of - 4.3% and - 3.1% p.a. respectively.

4)    Year-on-year headline CPI inflation rose in Q4,2024 to 2.9%, 2.5% and 2.4%, in the US, UK and eurozone, respectively, largely due to a smaller negative impact from energy prices relative to last year’s sharp declines. Core inflation, which excludes volatile energy and food prices, was little changed, but remains above headline measures, at 3.2% in the US and UK, and 2.7% in the eurozone.

5)    US 10-year yields rose 0.8% pa to 4.5% pa, driven by strong growth, expectations of a more inflationary policy mix under Trump, and anticipated higher bond issuance to fund tax cuts. UK 10-year gilt yields rose 0.6% pa to 4.6% pa, spiking after the Autumn 24 Budget, as investors digested a likely slower pace of rate cuts and higher gilt issuance. French 10-year yields rose 0.3% pa to 3.2% pa as political ructions led Moody’s to downgrade the country’s debt. Equivalent German and Japanese yields rose 0.2% pa to 2.4% pa and 1.1% pa, respectively.

6)    Credits spreads fell further in Q4,2024 leaving both investment and speculative grade spreads near historic lows. Global investment grade credit spreads remained at 0.9% pa while speculative grade credit spreads fell 0.2% pa to 3.1% pa.

7)    The results of the quarter mask a lot of volatility, stocks like the magnificent seven continued to outperform and commercial property is recovering with a return to normal conditions.

8)    The Committee noted that the global equity market index is mainly US based and magnificent seven stocks with high valuations placed on some markets and therefore they could be vulnerable to big drops in the market if expectations are not met.

9)    The independent advisor advised of three potential challenges; that tariffs will not be positive for growth and returns, if the magnificent seven stocks are broken up this could cause challenges to valuations, also  valuations are much higher in US, and if they were brought down this would have an effect on markets.

10)The Fund is a longer-term investor with a diversified portfolio which provides protection if there is a crash in the market and managers have convictions which they adhere to but there will be careful consideration of these matters as part of the strategy planning for next year.

11)Benchmarks are set to give an indication of relative performance of the investment managers against the broad equity market and there are some outliers who are currently struggling which is bringing down the overall relative figures.

12)In response to questions about underperforming funds, IC confirmed that he meet with WHEB Active Impact Equity which underperformed the MSCI World benchmark by 7.8% over the quarter. Active sustainable equity funds want to invest in companies who transition to a more sustainable position, they have a small sub-set of companies who meet their criteria and are therefore all invested in a small concentration which results in volatility from the benchmark in the short term. Additionally, these stocks screen out the magnificent seven which has led to underperformance across these funds.

13) IC noted that there have been some unsuccessful stock picks as small growth style companies tend to be selected but there are risks of overpaying. An example is Hello Fresh which did well during the pandemic but struggled afterwards which is a good example of an error in judgement.

14)Hymans will provide the necessary constructive challenge to the managers and there are no actions proposed at this point particularly with the uncertainty around pooling and the Committee noted that the fund will be kept under close review. 

15)Further to this WHEB announced last month that they are being acquired by another impact focused manager, Foresight group, WHEB will retain the brand and the team and this is considered to be a good match and there are no concerns at this point.

16)IFM have informed the Fund that IFM Investors, and the UK’s largest profit-to-member pension provider, Nest, have entered a binding agreement that will see Nest take a 10% ultimate ownership stake in IFM and provide foundation investments to help launch three new IFM products over the next 12-18 months, with presumptive support for new products into the future.

17)In response to a question about how Hymans can influence the stewardship function of the different managers, IC confirmed that the Responsible Investment team research the fund management teams so that there can be regular review and challenge, this is something that is taken seriously and more information can be provided on this to the Committee in future.

18)IC agreed to provide further information about the red rating for Baillie Gifford on a follow up e-mail.

66.3     The Committee RESOLVED to note the investment report.