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Agenda item

Review of Investment Strategy Review Including Responsible Investment Policy

To provide Committee Members with the results of the Investment Strategy Review and agree the strategic asset allocation and the Responsible Investment Policy for consultation




(a)  The Committee agreed the proposed Strategic Asset Allocation (as shown in paragraph 3.02) of the Fund as a basis for consultation with the Fund’s Employers.

(b)  The Committee considered and agreed the Responsible Investment Policy as the basis for consultation with the Fund’s Employers.



Mr Latham expressed the importance of Strategic Asset Allocation as the results of the next Actuarial Valuation will be affected by the decisions that are made today. Fortunately, the Fund is starting with a well-diversified strategy therefore the amendments are more of a minor procedure than major surgery. He outlined that the Committee were being asked to agree the proposed changes to the strategy at this meeting and then the Investment Strategy Statement would be brought for approval at the February Committee.

Mr Harkin presented the proposed revisions to the Strategic Asset Allocation expressing the following key points;

-       The Fund are better funded today however; the Fund are still in deficit therefore we need to invest to achieve the required level of return.

-       The integrated approach means getting the right balance of Investments, Funding and Covenant. The Fund are ahead of other funds as the Flightpath strategy is already in place, whereas other funds are just beginning to think about risk management.

-       The key is to focus on a longer term returns, by setting an asset allocation based on Mercer’s 10-year market forecasts.

-       Private markets have been very successful for the Fund; the challenge is to ensure that we can continue with what we have.

-       Expected returns are generated through statistical analysis by Mercer. Mercer will have forecasts which may not always play out but its ensuring that the asset allocation is effective.

Mr Harkin explained that the current investment strategy set in 2016 was expected to deliver 6.1% p.a. based on market forecasts at that time. However, based on 2019 market views the expected return would reduce to 5.4% p.a. The message is to expect a lower return going forward. Therefore, it will be necessary to ensure that the asset allocation is capable of achieving a return in excess of the Actuary’s discount rate i.e. CPI plus 3.2% which has been proposed. Mr Harkin expressed that the current climate in relation to investments is very uncertain so it is important to focus on the long term path, but this will be more difficult going forward.

            Mr Harkin explained that the key proposals were shown in the covering report and the presentation but also briefly summarised them as;

  1. Invest more in emerging markets.
  2. Disinvest completely from Diversified Growth Funds.
  3. Restructure the Hedge Fund mandate.
  4. Re-categorise Private Markets, and;
  5. Create Local/Impact investments portfolio.
  6. Review Cash and Risk Management Framework (CRMF).

            Councillor Bateman asked what Impact Investments are. Mr Buckland said that these investments look to make a positive contribution to society in addition to meeting investment risk/return requirements. Responsible investment is about ensuring long term sustainability, however, Impact Investments are the next stage, where the focus is to make a positive impact and generate returns for the Fund.

            Mr Hibbert queried how the Fund are going to record and report the impact. Mr Buckland said that they are currently considering how best to do that, and it will be articulated within the Responsible Investment Policy, after further discussion with officers.

            The Chairman asked what existing investments will move to this new portfolio. Mr Buckland said that there are a range of things to consider, with 17 goals in this area. There are a number of existing investments that could move into the new portfolio and, although this was yet to be agreed with officers, it was likely that around half of the 4% target allocation might be achieved through existing investments.

            Mr Everett stated that at a recent meeting he attended, it was raised that there are a significant number of investment opportunities in renewable energy. Mr Everett said that some of these could be appropriate opportunities for the Fund and he asked how to ensure that these opportunities are considered by the Fund going forward. It was agreed that Mr Harkin and Mr Everett will have a formal discussion on this aspect as part of the Pension Fund Advisory Panel meetings and the outcome will be reported back to Committee as necessary.

             Mr Buckland highlighted that on slide 21 of the presentation, the expected return for the Fund on the new proposed strategy is 5.6% p.a. which is an increase of 0.2% based on the current 2016 strategy.

            Mr Campbell clarified that when assessing the risk of an investment strategy it is important to measure this in a consistent way, and Mercer used a VaR approach. VaR stands for Value at Risk and represents the risk of loss for investments. It estimates how much a set of investments might lose with a given probability, in a given timeframe. The higher the VaR, the higher the risk. Mr Campbell highlighted the need for the Fund to take this risk in order to earn an adequate level of return above the discount rate, which is CPI plus 2.25% for future service accrual at the 2019 valuation.

            Mr Campbell explained that slide 25 reflected the key risks faced by the Fund within the Asset Allocation. The risks faced by the Fund are driven in the main, by inflation along with interest rates to the extent a more certain real return can be achieved. Equity risk is also another significant risk. He explained that the grey bars on the chart illustrate a reduction in risk, and the black bars demonstrate the total risk. There is an increase in risk of £7m and the chart on the right shows what is driving that. Mercer confirmed that they are comfortable with this and accepted that taking risk that was expected to be rewarded was appropriate.

            Councillor Bateman said in his view that the risk in respect of longer term interest rates and inflation can only go up. He asked what the interest rate is currently. Mr Campbell agreed with Councillor Bateman i.e. that there is a risk, and confirmed that on a 10-year gilt yield the interest rate is less than 1%. Mr Campbell emphasised how difficult interest rates are to predict, which is why the Fund has the risk management framework in place which aims to manage a lot of this risk.

            Mr Harkin confirmed that Mercer had built in headroom for the risk that things don’t go as planned and similarly this was done when setting the 2016 Strategic Asset Allocation.

            Mr Campbell explained that slide 29 illustrated the proposed disinvestment of Diversified Growth Funds. The disinvestment isn’t solely due to the poor performance of this class, but because Mercer believe that the Fund is able to hold a diversified portfolio without DGF and through the Best Ideas portfolio for tactical investing which actually performed better.

            Mr Hibbert asked around the proposed transition to the new strategy, and expressed concerns over time involved and the costs of implementation. Mr Harkin agreed that it is critical to avoid a lag, therefore Mercer will implement the allocation as quickly as possible.

            Mr Harkin continued to discuss the proposed restructure of the Hedge Fund portfolio. He commented that it was proposed that it would now consist solely of Man Group Solutions products who have a lot of market leading products. Mr Harkin confirmed that the proposal is to restructure the existing portfolio so that the Fund would make significant fee savings, including the netting of performance fees. If the new portfolio performs at an overall level, the Fund will pay a performance fee; but if it doesn’t, they won’t.

            Mr Hibbert questioned whether the fees will be higher if the Fund performance is higher. Mr Harkin stated the two things that the Fund will pay for; a fee to Man Group to manage the assets and a fee to cover the Hedge Fund mandate. Until the Fund get the minimum return level required, the Fund won’t pay a performance fee. This is called performance fee netting and is a very significant fee saving compared to the current position where managers are still paid even if performance targets aren’t met.

            Mrs McWilliam asked in respect of the new structure whether Mercer are expecting a change in return. She said that the fee saving is great if the return is going to be similar or greater. Mr Harkin confirmed that the new structure was designed to achieve higher expected returns as well as saving fees.

            Mr Buckland continued through the presentation and highlighted the four key approaches to responsible investing; integration, stewardship, investment and screening. He commented on the work that the Fund has already done in this key area, including being Tier One Signatory to the FRS UK Stewardship Code, whereas not many LGPS Funds have achieved this.

            He continued to talk through the process that the Fund had been through during the year to reach the proposed policy which was contained as an Appendix to the Committee report.

            Mr Hibbert proposed that throughout the policy, and specifically on page 33 and 34, whether the phrase ‘long-term financial risk’ could be changed to ‘financial risks’ as he argued that there are short term risks also. This change was agreed and the policy will be amended to reflect this.

            The presentation concluded by looking at the potential for fee savings within the proposed Strategy and where these fee savings were generated. Finally, the implementation timeline illustrated how the Fund would be looking to transition to the new Strategy and whether it will be implemented through the WPP. Hedge Funds and CRMF will not be implemented through the WPP at the current time.

            The Committee were comfortable with the proposed Strategic Asset Allocation and the Responsible Investment Policy.



(a)  The Committee agreed the proposed Strategic Asset Allocation (as shown in paragraph 3.02) of the Fund as a basis for consultation with the Fund’s Employers.

(b)  The Committee considered and agreed the Responsible Investment Policy as the basis for consultation with the Fund’s Employers.


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