Agenda item

LGPS Investment Performance

To receive a presentation from PIRC looking at investment performance across the LGPS universe.

 

Minutes:

The Chairman welcomed David Cullinan from PIRC to present the investment performance across the LGPS universe to the Committee.

During the presentation, a number of comments and questions were raised by the Committee and officers/advisers.

Mr Cullinan introduced himself and gave the Committee a brief summary of PIRC. His belief was that there are negative views in the press regarding the LGPS performance and he challenged these views. Key points from the presentation were;

·         The statistics shown were based on facts not opinion and 60 Funds participate in the universe.

·         The last 12 months performance has been very positive (21.4%) driven predominately by equities

·         Over the longer term only 6 out of the last 30 years have had negative investment returns.

·         Over the last 20 years the assets returns have been extremely positive with a real return above inflation of 6% p.a.

·         Therefore the asset performance was not the problem with funding; the issues were with the liability costs.

·         Over the last 30 years the asset allocations in the LGPS have become more complex moving from traditional assets (equities/bonds) with a few managers to more complex structures (10 or more managers and more active management) but this active management has added c0.4% pa to return.

·         There is a positive link between risk and return as perhaps expected

·         There appears to be some additional return impact for larger Funds (by asset size) over the long term but this is likely due to a quicker move to alternative assets such as private equity/property and possibly internal management capabilities reducing fees.  This performance advantage has been much eroded more recently.

·         Pooling across England and Wales should provide economies of scale (including internal management) and access to broader investment choices.

·         Difficult to say at this point if pooling will provide stronger Governance and Decision making but it’s critical the operator has robust processes around cost transparency and manager selection. It should be noted that lower fees are not a measurement of value for money – it’s the return net of fees which is important.

·         Different Pools possibly have different objectives e.g. London reducing manager numbers and costs but Wales leveraging scale for cheaper access to certain asset classes.

A number of comments were made and clarification questions were asked.

Mr Everett asked how can it be quantified whether the Fund is overpaying for some investment services and how the Fund evaluates fees to get value for money. Mr Cullinan noted this will be covered in the next presentation but in his view it could be done by comparing gross returns and net returns albeit this is a crude measure so other factors need to be borne in mind e.g., differences in allocations, risk profiles and added value.

Cllr Llewelyn-Jones queried the independence that the WPP has i.e. will there be pressure from the Welsh Government to invest in infrastructure projects in Wales. Mr Everett responded to this query by confirming that the Fund is independent and that they have to make decisions in the Funds best interest, However there will a number of projects which could be considered by the WPP in terms of the potential for investment by Funds.

Mrs Fielder commented that pooling could (in theory) give the Fund access to the “best in class” managers but aren’t all pools chasing the same managers and could just individual Funds do the same? Mr Cullinan responded by stating that the biggest funds currently get access to best in class managers but the difference is the overall scale of access which would reduce costs if more Funds enter into the arrangement.     Other pools may well look to invest in the same managers but there will be different views to what is best in class and how the managers are accessed will be important (which will be different by each Pool).

Mrs McWilliam asked Mr Cullinan how he measured volatility.  Mr Cullinan responded by stating that they are measured from the lowest to highest point as the standard deviation over a 36 month period.

Mrs McWilliam asked Mr Cullinan for clarification on the term “performance from active asset allocation” for the new members of the Committee when considering the issue of active management adding value. This was clarified as the actual performance of a Fund versus if it would have invested its assets in their benchmark allocations.

Mrs McWilliam enquired whether the performance quoted was measured net of fees. Mr Cullinan confirmed that the longer term figures were not net of fees.

 

 

The Chairman asked if Mr Cullinan had any thoughts on whether the LGPS as a whole will change investment allocations over the next 10 years.   Mr Cullinan’s view was that allocation to traditional risk assets like equities would fall and we would see an increased allocation to investments in infrastructure, Diversified Growth Funds and other alternative asset classes. 

 

Mr Latham noted that moving to higher allocations in alternative assets will increase costs so it is important that costs are not the only consideration in performance of the pools.

The Chairman thanked Mr Cullinan for his presentation.