Agenda item

Report of the Executive Director Corporate Services

This report presents the performance of the Pension Fund investment portfolio and that of the individual investment managers for the quarter ended 31^st December 2019.

Consideration was given to the report of the Executive Director Corporate Services.

The Committee noted the performance of the Camden Pension Fund investment portfolio and the individual investment managers for the quarter ended 31st December 2019 (quarter 4 of 2019).

The Committee noted in particular that

-        The Fund portfolio had a market value of £1.822bn at 31^st December 2019 compared with £1.786bn at 30^th September 2019.

-        As at Q3 (2019-20), the Fund assets had outperformed long-term target set at the triennial valuation in 2016 by 23% (£341m).

-        The Fund achieved 0.3% above target this quarter and was in line with very strong performance of global equities over the 2019 calendar year.

Committee Members noted Appendix A “Camden Client Ranking by Manager” which detailed Camden’s exposure as clients to the overall fund or strategy managed by Investment Managers. Where Camden represented more than 5% of each fund and there was a material increase, due to client outflows, this would be reported to Committee on an exceptions basis.

The Committee also noted Appendix B, which presented a more comprehensive overview of the financial markets by the Independent Investment Advisor and reported the performance of the individual Investment Managers in more detail. Karen Shackleton, Independent Investment Advisor highlighted the salient points as follows:

(a)    London CIV - Baillie Gifford – This sub-fund delivered a return of +4.88% in Q4, outperforming Harris by +1.08%, and by +3.6% for the 12 months to Q4 2019. They outperformed the performance target by +2.79% for the quarter and by +2.34% for the 12 months (source LCIV). In terms of assets under management, the LCIV sub-fund stood at £2,782.4 million as at end December, an increase of £77.2 million since the previous quarter end. The market environment was favourable to Baillie Gifford in 2019. London Borough of Camden’s investment represented 11.43% of the Fund.

(b)    Harris – Harris’ stock selection had a positive impact, contributing +2.27% to the return relative to the Index in Q4 2019, while sector selection was negative, contributing -0.16%. For the past twelve months Harris had continued to trail its performance target by -1.23%.  As at quarter end, the fund had a 48.20% allocation to Europe, and a 38.90% allocation to the US, with the balance in Asia/emerging markets. The independent adviser would continue to hold quarterly calls with Harris until their longer term performance improved. Again, the market had been friendly to value managers.

(c)    Insight - The fund performed positively in absolute terms (+4.13%), and in relative terms it outperformed three month LIBOR by 3.93% in Q4 2019 which led to it being above its target by 2.94%. They had performed better than CQS, as their inflation bets played out, so the Fund had not lost out by putting this divestment on hold.

(d)    Legal & General - The observed tracking errors on the pooled index funds were within expected ranges during the quarter. As the tracking was still in line with expectations, there were no concerns.

(e)    CBRE - As at quarter end the portfolio had 23 investments and leverage on the portfolio stood at 10.6% compared with 10.9% last quarter.

(f)    Partners - The 2009 Fund had invested in a total of 61 investments, with 33 investments having now been realised. This Fund was fully invested, and Partners had called down 95.3% of committed capital. The manager had distributed 107.5% of the invested money since inception and was continuing to focus on exits and distributions as several investments in the portfolio moved into the realization phase of their lifespan. 15% of the investments were above expectations, 24% were meeting expectations, 53% were outperforming and 8% had issues.

The 2013 Fund had made 42 investments as at 31^st December 2019, with 12 having been realised. The Fund was 84.2% invested and had distributed 62.6% (as a percentage of invested amount) since inception. 27% of the investments were above expectations, 49% were meeting expectations, 23% were outperforming, and 1% had some issues.

The Pension Fund had committed capital to Partners’ Group’s 2017 Fund. The Fund had drawn 45.0% of commitments as of quarter-end and had 36 investments.

(g)    Barings - delivered a return of +1.5% performing better than both Standard Life GARS (+0.7%) and Ruffer (+1.0%). Negative company news impacted their holdings and on this point, Councillor Madlani wanted to know their exposure to aircraft leases.

(h)    Standard Life GARS - had a positive quarter, and delivered a return of +0.65% in Q4 2019, however it underperformed the benchmark which returned +1.45%.

(i)     London CIV - Ruffer - the Fund delivered a return of +1.0% in Q4 2019. This mandate had been invested since 21st March 2018, and the fund had returned 2.5% since inception. As at the end of Q4 2019 the fund had a beta of just 0.4, so if the equity market increased by 10%, the fund would be expected to rise by 4.0%. The LCIV sub-fund was valued at £868.3 m as at end of December and London Borough of Camden’s investment was equivalent to 6.69% of the Fund. It was noted that they had around 75% exposure to Sterling.

(j)     Harbourvest – Camden’s pension fund had committed $86.3 million to HarbourVest’s Global Fund 2016. Around 63% had been drawn down as at 31^st December 2019. A total of $24.5m had been distributed back to investors (0.45x capital paid in).

(k)    London CIV – CQS - The Fund committed capital to CQS, a multi-asset credit fund, in May 2019. In Q4 the fund returned +1.34% which was slightly above target return of LIBOR +4.5% per annum. The value of fund’s investment in CQS stood at £49.8 million as of end December 2019, which represented 5.8% of the sub-fund. The London CIV had had CQS on a watch rating for several months. This was a result of concerns about performance, leverage and senior management changes. CQS had held ongoing dialogue with LCIV around these issues. The leverage concern had arisen as a result of poor communication and this has been rectified. The leverage in the portfolio was due to their currency hedging strategy and did not represent a risk. CQS’ performance in 2019 was +6.37% (Camden did not invest until May 2019, however). As a result, over one year the manager has exceeded the performance target. Regarding the senior management issues, the concern had been around the new Chief Executive Office (CEO), Chief Financial officer (CFO), Chief Risk Officer (CRO), and Head of Legal Counsel. This team had now been in place for about a year and there had been no changes to the multi asset team, nor the investment process for the fund. Whilst this was reassuring, the CEO announced in February that he planned to step down from the role for personal reasons. He would continue as a strategic adviser to CQS and the CFO had been appointed as interim CEO. This was something to monitor closely over coming months.

(j)     London CIV – Infrastructure Fund – Camden’s Fund committed £106 million of capital to London CIV’s infrastructure fund, in October 2019. The total commitments to the fund stand at £399 million which represent 26.6% of the Fund. Long-term, the fund would aim to achieve a net return of 8% to 10% p.a. over rolling four-years, and a cash yield of 4% to 6% p.a.

Committee Members were concerned that Partners were holding 10% of the Fund, but were not performing as well as expected. Karen Shackleton replied that Partners had set themselves an absolute target of 15%, which in her view was optimistic. Members were reminded that a meeting with the investment manager would be held in either July or October to which all Committee members were invited to attend.

          TO NOTE: All

Councillor Madlani also asked what the LCIV and JP Morgan were doing in relation the erasing of LIBOR in 2021. Officers agreed to get back to him on this issue.

          ACTION BY: Executive Director Corporate Services

Kevin Corrigan, Interim CIO, London CIV, was in attendance at the meeting and reminded the Committee that in July 2019, the CIV had put CQS on a watch rating due to concerns about performance, leverage and senior management changes. Since then the CIV had held ongoing discussions with CQS around these issues. The CIV had recently removed CQS from the watch listing but would continue to monitor them as they were still concerned about the high turnover of managers. The CEO announced in February that he would be stepping down from the role for personal reasons, but would continue in an advisory role. The CFO had been appointed as interim CEO until a permanent appointment was made, although it was noted that there was no confirmed timeframe for this. This situation was of some concern as the CEO was an integral part of any investment manager. The CIV would continue to monitor this closely, but was of the view that investments with CQS could continue.

Karen Shackleton had provided some comments on the CQS and the CEO situation when commenting on the independent investment managers above. She had no concerns about leverage in the portfolio or CQS’ performance. She added that the role of the CEO was very important as they were the driver of any company and it was important to continue to monitor this situation. However, the CEO had stepped down for personal reasons rather than business reasons, which was not such a concern. He had planned a number of changes for the company and the investments team had been quite positive about those changes. These included investment opportunities in China and technology which had been put on hold.

The Head of Treasury and Financial Services reminded the meeting that at its meeting on 27^th February 2019, the Committee had agreed the transition of assets in four quarterly instalments from Insight to the CIV multi asset credit sub-fund run by CQS. Authority was delegated to the Executive Director Corporate Services with regard to the conclusion of this transfer, including legal due diligence and transition of funds. The transition would be monitored over the four quarters by the Pension Committee. The transfer was subsequently put on hold due to CQS being put on watch and to enable the CIV to continue to monitor and work with CQS. In the meantime, officers were asked to carry out a cost benefit analysis on whether or not the transition of funds from Insight to CQS should continue. Now CQS had been taken off the watch list, the Committee could decide whether or not it wished to continue with the transition of funds.

Given that the CIV had removed CQS from the watch list, the Chair proposed that the transition of funds from Insight to CQS should now restart, subject to further discussions between the Executive Director Corporate Services, the Chair, Karen Shackleton and ISIO and confirmation from those officers that the transition should proceed.  As the next Committee meeting was not until July, authority would be delegated to the Executive Director Corporate Services with regard to the conclusion of this transfer. As previously agreed, the transition would be monitored over the remaining quarters by the Pension Committee.

RESOLVED –

(a)            THAT the contents of the report be noted;

(b)            THAT authority be delegated to the Executive Director Corporate Services with regard to the conclusion of this transfer and subject to further discussions between the Executive Director Corporate Services, the Chair, Karen Shackleton and ISIO and confirmation from those officers that the transition should proceed; and

(c)             THAT, as previously agreed, the transition to be monitored over the remaining quarters by the Pension Committee.

ACTION BY: Executive Director Corporate Services