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 30 June 2021.

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 30 June 2021 (quarter 2 of 2021) and since manager inception.

The Committee noted in particular that:

·         The portfolio had a market value of £2.212bn at 30 June 2021, compared with £2.095bn at 31 March 2021, an increase of 5.6%. However, this figure included the prepayment of secondary contributions by Camden Council, so excluding this, the overall return on the Fund’s investments was 5.6%, which was still in excess of the composite target of 4.7%

·         The Fund’s equity allocations still remained above the strategic asset allocation levels, due to strong outperformance of equity markets over successive years. The high proportion of equities drove much of the volatility in overall returns. The Fund was outside the target ranges in all asset classes apart from property and private equity. This would be addressed as the Fund implemented its new agreed investment strategy.

·         The Fund had now completed its transition from the L&G UK Equities Fund to the Future World Fund, in which at the end of June 2021 the Pension Fund had £270m invested.

·         The estimated funding ratio in June 2021 of 124% (£1.784m of liabilities) was based on the investment strategy returning in-line with the actuary’s estimations for the coming years and decades. Long-term asset performance was, however, considerably above the actuary’s historic expectations.

·         The Fund had outperformed its composite target by 0.9% in Q2. This was far more than what the actuary assumed (4.5% per annum) at the last Triennial Valuation. Since inception, the Fund had returned 10.2%.

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 +7.11% in Q2, outperforming Harris by +1.2% for the quarter but underperformed Harris by -9.9% for the 12-month period. However, Baillie Gifford outperformed its target over 12 months and continued to show long term outperformance. They had a very strong absolute return of +30.83%.  The beta on the portfolio as at quarter end stood at 1.23, which meant that if the market fell by 10%, the portfolio was expected to fall by 12.3%. The London CIV (LCIV) monitored this manager and was “disappointing” that the manager did not generate high relative returns over the quarter, particularly since Growth outperformed Value style indices in Q2. LCIV noted that much of the strong performance from the index was driven by “FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google), to which the portfolio had less exposure.  Also an investment in China Brilliance (around 0.2% of the portfolio) was written down by 50% following regulatory investigations. Baillie Gifford had written to management, but there had been no response to date.London Borough of Camden’s investment represented 13.13% of the fund.

b)   Harris – Harris outperformed the Value Index, but against the market capitalisation index, their stock selection had a negative impact, decreasing performance by -1.08%. Sector selection detracted a further -0.25% from the return relative to the index in Q2 2021. Most of the negative return from stock selection came from holdings in consumer discretionary, which detracted -0.97% from the return. Despite a poor quarter in relative terms, for the past 12 months, Harris had outperformed its performance target by +12.47%.

c)    Insight – The fund performed positively in absolute terms (+0.4%), and in relative terms it underperformed the benchmark by -0.6% in Q2 2021. Over three years, however, it continued to fail to meet its target of outperforming the benchmark by +4.0%.

d)   Legal & General – The observed tracking errors on the pooled index funds were within expected ranges during the quarter. There were no concerns.

e)    CBRE – The Independent Advisor, officers and Committee Members met with CBRE this week. This quarter showed a mixture of both positive and negative returns, although the majority were positive. Two funds were of concern – Lend Lease Retail produced the worst returns for Q2 at -13.5%, attributed by the manager to a decrease in the value the fund was holding in Bluewater shopping centre and Touchwood, Solihull. Touchwood had now been sold but Bluewater needed to be monitored. The Nuvene shopping centre was also a concern and held 3 assets of concern, including the Bullring in Birmingham. As at quarter end the portfolio had 23 investments and leverage on the portfolio stood at 11.10%, a slight decrease from the last quarter at 11.40%.

f)     Partners – The 2009 Fund the 2009 Fund had invested in a total of 61 investments, with 39 investments having now been realized. This Fund was fully invested, and Partners had called down 95.3% of committed capital. 11% of the investments were above expectations, 20% were meeting expectations, 59% were outperforming and 10% had issues.

The 2013 Fund had made 42 investments, with 14 having been realized. It was 72% contributed and had distributed 57.6% since inception. 7% of investments were outperforming , 10% were above expectations, 57% met expectations 22% were too early and 4% had some issues. The 2017 Fund remained in its value creation stage.

g)   Barings – The fund was fully liquidated and closed on 30^th June 2021.

h)   Aberdeen Standard Life – Standard Life GARS had a positive quarter and delivered a return of +0.7% in Q2 2021. However, it underperformed the performance target which returned +1.3%. The manager had asserted that they need 60% of their central return forecasts to be positive, in order to achieve their cash target of six-month LIBOR plus 5%. At present they were only achieving a success rate of 40% (in Q2, 14 strategies added value and 21 were neutral or detracted value). The expected volatility of GARS stood at 7.7%, which was 46% of the volatility of equities (16.9%), and within the normal range expected (the manager expected the volatility on GARS to be around one-third to one-half the volatility of equities).

i)     London CIV - Ruffer –. The fund no longer invested in Bitcoin which had previously been a concern. The one-year return as at end of June 2021 was positive at +14.3%, comfortably ahead of the performance target of +3.1%. The manager was also ahead of the target over three years, delivering a return of +6.7% per annum. As at end Q2 2021, the fund had a beta of just 0.26, which meant that if the equity market increased by 10%, the fund would be expected to rise by 2.6%. The sub-fund was valued at £1,121.8 million as at end June (up from £1,018.3 million in Q1). Camden’s investment was equivalent to 6.36% of the Fund.

j)     HarbourVest – Camden’s Fund had committed $86.3 million to HarbourVest’s Global Fund 2016. Around 73% had been drawn down as at 30^th June 2021. A total of $38m had been distributed back to investors (0.61x capital paid in). 42% of the investments were above expectations, 45% were meeting expectations, and 14% were currently below expectations.

k)    London CIV –CQS –The fund returned +2.0% which was above the target return of 3 months of LIBOR +4.5% (+1.1%). The one-year return for the fund was ahead of the benchmark by +8.7%. The fund was still under enhanced monitoring, but the hiring of a second manager to the fund would help with some of LCIV’s concerns.

l)     London CIV – Infrastructure Fund – The fund was progressing steadily and capital calls had been made which indicated that the deployment rate had picked up.

It was noted that in accordance with the Committee’s decision taken at is meeting on 28^th July 2021, the Executive Director Corporate Services, in consultation with the Chair of the Pension Committee, had taken the decision in September 2021 to switch the Pension Fund’s investment from the current Baillie Gifford sub-fund to the Paris-aligned version.

The Chair suggested that performance targets would need to be reviewed in the future as 15% was not realistic and needed to be more in line with the market. It was noted that ISIO had been asked to look at the performance of the two property managers, in their peer groups and whether they were best in class or not. As previously mentioned CBRE had struggled to meet their target and had problem with two of their funds. Consideration would also be given to whether Camden wanted to invest in the next Partners fund. A report would be brought to a future Committee meeting on this issue.

ACTION BY: Executive Director Corporate Services

It was recognised that retail property was struggling due to a change in shift of buying habits. The Independent Advisor said that the Fund managers should decide which sector of property was the best to invest in. If they felt that retail was struggling, they could shift to another form of property investment, like industrial or health care property investments or student accommodation. In the long term they were likely to move away from those type of funds.

RESOLVED –

THAT the contents of the report be noted.