Agenda item
Annual Update from W M
To receive an annual update on the performance of the Pension Fund.
Minutes:
Ms Coventry of The WM Company tabled the report "London Borough of Tower Hamlets performance review period ending 31 March 2013." She introduced herself and advised that The WM Company tracked the performance of 90% of local authority pension funds. She advised that her presentation would comprise the following elements:
· financial returns, strategies and trends
· the annual performance of Tower Hamlets pension fund,
· the performance of Tower Hamlets pension fund compared with other local authorities
Financial returns, strategies and trends:
Ms Coventry advised that returns on equities in the period 2012 – 13 had been favourable. Active managers had done well against benchmark and there had been above index return in all markets except USA. She advised that equities performance had been volatile (page 5) but returns were above average over 3, 5, 10 and 20 years. Performance of bonds had been less volatile but returns were lower especially over 10 and 20 years.
She advised that:
· annual returns in respect of alternatives (page 6) were 9.2% over 20 years but this did not apply to all categories of alternatives
· average returns in both cash and alternatives categories were below equities
· annual returns for property were in line with quoted levels but presently still negative
· average total assets returns for local authorities had achieved benchmark
Therefore returns had been achieved but liabilities were higher.
Asset allocation performance (page 8) tended towards reducing risks and, to achieve this, portfolios were more diversified. As funds were restructuring there was a move towards global markets; UK equities comprising 30% and the remainder comprised of overseas equities. Mr Woodman enquired and Ms Coventry confirmed that Investec were an absolute return category of fund. She noted that the Council's decision to invest in these funds was ahead of trend.
The Chart ‘Performance Range Relative to Benchmark’ (page 9) indicated the performance range over 1, 3, 5 and 10 years compared to its own benchmarks. Ms Coventry advised that most returns had exceeded their benchmark and that some benchmarks are being measured against cash which had rendered it easier to outperform benchmark. However, most 5-year investments had underperformed. Mr Gray enquired and Ms Coventry confirmed that the performance reported was gross of fees.
Annual performance of Tower Hamlets pension fund:
Ms Coventry provided the following information in relation to total fund performance against strategic benchmark:
· The total Fund value summary (page 11) indicated the fund composition across the fund managers and was valued at £929 million at 29 March 2013, 63% of this was allocated to equities.
· Relative fund returns (page 12) were 11.8% in 2013; these were ahead of benchmark within the year. Performance over 20 years was 0.5% below the benchmark. This low return was due to exposure to UK equities.
· Mr Shonola advised that manager, Martin Currie and Aberdeen Asset Management had been dismissed two years ago and the Fund moved to a passive mandate for UK equities.
· The Fund had underperformed over the last five years, however other local authorities funds had performed similarly
· Tower Hamlets’ performance was in the middle of the range compared to other authorities with lower risk and with lower risk than other authorities. It was noted that the lower risk was due to the fund structure which contained passive strategies.
Ms Coventry provided the following information concerning manager performance (section 3):
· Tower Hamlets fund was 0.6% ahead of benchmark and the following manager performance was noted:
o GMO performance was below the benchmark
o Legal and General was a passive manager and matched benchmarke as expected
o Baillie Gifford had delivered good returns above benchmark
Performance of Tower Hamlets pension fund compared with other local authorities:
Ms Coventry provided the following information (section 4):
· the Fund had outperformed against its own strategy. It was noted that this would drive performance more than managers performance
· comparison with other local authorities’ performance needed recognise that each of them operated different funding strategies. Mr Shonola noted that the Tower Hamlets strategy reflected its present position and its strategic aims
· in the last year and in the longer term Tower Hamlets was 1.8% below average. Asset allocation only added 1% therefore stock selection was the driver
· Bonds return was 4.9% below the local authority average
· in regard to the absolute risk and return percentage over 5 years (page 20), Tower Hamlets’ performance was in the lower range of risk and therefore average performance could be expected
· the latest five-year risk and return chart (page 21) also indicated Tower Hamlets fund position in the lower risk return range
· many other authorities were presently engaging a larger number of managers to deal with their investments
Due to time constraints the Chair moved and the Committee agreed to submit written questions concerning the presentation to Ms Coventry.
Ms Coventry left the meeting; the Committee then discussed the presentation and the following matters were raised:
· Cllr Jackson noted that the strategy, while conservative, was not totally risk averse. The Committee was advised that:
o that the Fund had performed within the local authorities’ cluster.
o the Council had taken a decision against exposure to a lot of risk
o two years ago a decision had been taken to invest UK equities via a passive mandate.
o the strategy was the driver of performance rather than the managers engaged
· Cllr Gardner enquired whether benchmarks were sufficiently ambitious within their own categories and whether it may be necessary to change the strategy in order to benefit from greater returns. The Committee was advised that:
o as the benchmark level indicated the level of exposure of the investment, if risk were higher the benchmark would be also higher correspondingly.
o Mr Woodman noted that equity markets, since the financial crisis of 2008, had been supported by quantitative easing by the United States Federal reserve and therefore did not recommend that more equity exposure was undertaken at the this time
o Mr Haynes noted that active equity managers in the UK had not outperformed the market for a long period.
o Mr Holme suggested that small improvements to the strategy should be considered after the triennial evaluation. It was noted that the funding strategy statement (triennial evaluation) would be available at the end of 2013 and brought to committee in February 2014.
· Cllr Jackson enquired why less complex funds had produced high returns. She was advised that Hymans Robertson had studied this matter and the returns were due to:
o high levels of diversification which enabled such funds to weather any unfavourable markets and
o low manager turnover because this action involved costs
In view of this, Mr Woodman recommended that unnecessary changes to fund structure should be avoided.
· Mr Gray enquired:
o what cumulative performance would be given if figures were reported net of fees. Mr Woodman illustrated his answer referring to ‘total assets’ at page 7 of the presentation and advised that total assets reported over 10 years were 9.4, equivalent to a 90% return over the period. This figure was a gross sum and 3% should be removed for fees over the annual period.
o how net figures could be better reported and Mr Shonola advised that it would be difficult to persuade managers to report these figures since fee structures would likely be disclosed; this contractual information was confidential. Additionally fees were in fact paid at different times and at different rates; therefore for reporting purposes, sums were annualised. He noted that the table also gave indicative costs of running the fund.
· Mr Gray noted that it would be beneficial to quantify fees as they amounted to a sizeable sum when compounded over 10 years. Mr Woodman supported the principle of reporting performance net of fees but felt that WM would not be able to provide these figures as managers’ fees would then be disclosed and this was commercially sensitive information.
RESOLVED:
1. That the tabled report and the verbal update be noted
2. That the Committee’s question be submitted to Ms Coventry in writing
Action by:
OladapoShonola, Chief Financial Strategy Officer – Resources