Agenda item

The Committee considered a Pension Investment update.

The Chief Financial Officer introduced the report and made the following comments:

·         Nomura had been moved from being formally 'on watch' to 'being monitored' given the improvement in performance, however this trend needed to be sustained. A number of changes had been made to their team, particularly the change of manager which had improved the level of confidence in their work. Although performance had improved recently, it was still not sustained over a longer period and therefore their performance should continue to be monitored

·         Capital International had been underperforming over a 10 year period. They tended show the same pattern of performance whereby they recovered slowly from a period of poor performance but then failed to maintain that level of performance. They had been asked for a sustained improvement in performance but this had not materialised. Confidence had been lost in the way the investment decisions were made and their decision-making processes. It was recommended that its mandate be withdrawn and that the funds be placed in passive investments in the US under management by LGIM pending a review within the Strategic Asset Allocation later in the calendar year

·         The performance of JP Morgan – performance had shown some improvements but it was recommended that they remain 'on watch'

·         JP Morgan – Bonds always achieved above benchmark but not above their performance target. They had argued that they had justified their fee but this was not felt to be the case. The Asset Allocation and manager role would be reviewed within the Strategic Asset Allocation

·         The contracts had been signed with the Walton Street Fund committing the remaining £27.5m out of the original £200m allocation to Property and Infrastructure.    

In the ensuing debate, the following principal points were raised:

·         Capital International did not seem able to sustain any consistent winning performance and therefore it was appropriate to end their mandate

·         In response to a query about whether the performance of Capital International was sufficiently poor to justify termination, the Chief Financial Officer explained that Capital International had a target to outperform the benchmark by 1 ½% over a 3 year period. However Capital had struggled to achieve this and at some times were not even achieving performance that would have been achieved in a Passive delivering tracker fund.  The reason that their performance in absolute terms was above the performance of the LGIM portfolio was that the US market had gone up and therefore there was more absolute return in the US portfolio, however their active management had not delivered the performance target. At present, it was recommended that the funds remain in the passive market until a decision was made in the autumn whether to reinvest in the US market in an active sense.   

RESOLVED that:

a)    the Independent Financial Adviser's fund performance summary and market background be noted;

b)    the update on the Investment Managers placed 'on watch' by the Pension Investment Advisory Panel be noted;

c)    the recommendation from the Pension Investment Advisory Panel to terminate the Capital International mandate be approved with assets transitioned to the North America section of the LGIM passive equity portfolio; and

d)    the update on the appointment of Walton Street be noted.