A report of the Strategic Director Finance, Governance and Support was presented to inform Members how the Investment Advice recommendations were being implemented and to provide a detailed report on transactions undertaken and the Fund's valuation.
The Fund continued to favour growth assets over protection assets. It was considered that in the long run, Bond yields would rise, but at present and while central bank intervened in the Bond markets, through quantitative easing, yields did not meet actuarial requirements for the Fund and should continue to be avoided at around these levels unless they were held as a short term alternative to cash. The Fund had no investments in Bonds at this time.
At the June 2018 Committee it was agreed that, a maximum level of 20% of the Fund would be held in cash. Cash levels at the end of September 2018 were 17.7% The Fund would look to use this cash to move away from its overweight position in equities and invest further in Alternatives. If the value of other asset classes fell, particularly Equities, there was a possibility that the short term cash level could rise over the maximum set.
Investment in direct property should continue on an opportunistic basis where the property had a good covenant, yield and lease terms. A property costing approximately £16m was purchased in the quarter.
Investment in Alternatives, such as general and local infrastructure and private equity, offered the Fund diversification from equities and bonds. They came with additional risks of being illiquid, traditionally had costly management fees and investment could be a slow process. However the Fund was considerably underweight its customised benchmark and should look to increase its allocation in this asset class up to the customised benchmark. No new commitments were entered into this quarter. A summary of Equity Returns in the period was provided at paragraph 4.5 of the submitted report. It was highlighted that the second column showing the percentage return should be dated October 2017 to September 2018.
Appendix A to the submitted report detailed all transactions for the period 1 July 2018 to 30 September 2018. This period included the transition of the Fund's UK Equity Portfolio to Border to Coast and the Fund's US and European Equity Portfolios to State Street. There were net sales of approximately £9m in the period, this compared to net sales of £199m in the previous reporting period.
As at 30 September 2018, the Fund had £717.5m invested with approved counterparties at an average rate of 0.68%. This was an increase of £26.7m over the last quarter. The Strategic Director Finance, Governance and Support had authorised the following highlighted change in the Treasury Management Principles (TMPs) to the criteria for the approved counterparty list:
"Those banks, from Denmark, Finland, Norway or Sweden, with £5bn in assets (rounded to the nearest £100m), which also had a rating at least equivalent to AA-, and their wholly owned subsidiaries."
The Fund Valuation detailed all the investments of the Fund as at 30 September 2018 and was prepared by the Fund's custodian, BNP. The total value of all investments, including cash, was £4,160 million. This compared with the last reported valuation, as at 30 June 2018, of £4,096 million.
An analysis of the summary valuation showed the Fund's percentage weightings in the various asset classes as at 30 September 2018, compared with the Fund's customised benchmark and the advisors' short-term asset allocation range.
For the first time the Fund now had passive equity investments and had agreed to aim for a ratio of 50:50 active to passive equity investments through investment into the Border to Coast Overseas Developed Markets Equity sub-Fund. The ratio at the end of September 2018 was 45:55 active to passive. For the longer term, the plan was divest a significant amount from equities, reducing the Fund's equity weighting to 50%.
The Fund did not have any investments in Bonds at the current time and the level of cash invested was 18%. Cash would be reduced through investment into other asset classes in the near term. In addition cash was being used to supplement the gap in contribution receipts and pension payments. However, in the medium to long term a planned programme of investment would be required to cover the gap rather than using cash.
The current strategy for property was to increase direct property investments by £50million on an opportunistic basis.
A number of investment opportunities in infrastructure and private equity funds were being considered. In the medium to long term, it was proposed that commitments would be made through Border to Coast once their sub-Funds were available. It was agreed at the September 2018 meeting that the Fund would commit £100 million in year 1 and £50 million per year for the subsequent 4 years to infrastructure to Border to Coast. The Fund was also looking at options for investing in secondary market funds in private equity at an amount of between £100 and £200 million.
ORDERED that the report was noted.