Agenda item

Report attached.

 The Committee received a report from officers on the performance of the Havering Pension Fund investments for the quarter ending 30 September 2011. The net return on the funds investments for the quarter was -8.8%, an outperformance of -2.1% against the combined tactical benchmark and an under performance of -20.7% against the strategic benchmark. The overall net return of the Fund’s investments for the year to 30 September 2011 was -2.2%, this represented an under performance of -2.0% against the annual tactical combined benchmark and an under performance of -14.3% against the annual strategic benchmark.

a)            Hymans Robertson (HR)

HR advised the Committee that during the quarter a number of major threats to the global economic and financial system had eroded investor confidence. Although the Greek debt crisis dominated the headlines, concerns over the level of sovereign debt extended to other countries, including Spain, Italy, and even the USA. In July the world witnessed the unedifying spectacle of the USA coming close to ‘default’ as politicians clashed over whether and how to extend the country’s debt ceiling.

The sovereign debt crisis was accompanied by evidence of a slowdown in global economic growth and talk of a ‘double dip’ recession. Downgrades to economic forecasts became the order of the day, culminating, in September, with a warning from the International Monetary Fund that the global economy had entered a ‘dangerous new phase.’ The Fund’s prognosis for developed economies was one of weak and bumpy expansion, with recession a possibility if issues relating to the US and Eurozone economies were not dealt with.

Investor caution was expressed by a preference for ‘safety.’ Equity markets had fallen sharply during the quarter, in contrast, government bonds of countries spared the worst of the debt crisis (e.g. UK, US, Germany) fared well. The price of gold and other precious metals rose sharply.

Key events during the quarter were:

Global Economy

·        Published data pointed to decelerating economic growth in UK, US, Euro-zone and Japan.

·        The US central bank launched ‘operation twist’ in an effort to stimulate economic growth.

·        Short-term interest rates were raised in the Euro-zone to counter inflationary pressures. No changes had been made in the UK or US.

·        Disharmony amongst Euro-zone members over Greek debt crisis had led to criticism by US.

·        Emergency liquidity was provided by leading central banks to support the banking sector.

Equities

·        Bank shares fell sharply on concerns over exposure to ‘at risk’ sovereign debt.

·        The strongest sectors relative to the ‘All World’ Index were Technology and Health Care (both +9.4%) and Telecommunications (+8.8%); the weakest were Basic Materials (-10.4%) and Industrials (-7.1%).

Bonds

·        The yield on 10 year US Treasuries fell below 2%, its lowest since the early 1940s.

·        Greece moved closer to defaulting on sovereign debt despite rescue packages.

The outlook for the global economy remained unclear, with more risk apparent on the ‘downside’ than the ‘upside’. Further monetary stimulus was on the agenda but the immediate priority was the sovereign debt crisis that brought the very future of the Euro into question.

HR presented the committee with a review of each of the fund’s managers and provided an update on their performance.

HR informed the Committee that in quarter 4 the equity markets had rallied with a rise of 4 - 5%, this would still leave the market down by 9% for the year. US stocks were attractive. Bond markets (Government) were up 14 - 20% for the year, with corporate bonds up 5% for the year.

The Committee indicated they wished to keep a close eye on Standard Life’s continuing performance.

Following discussion the Committee indicated that they were happy with Ruffer’s performance.

Following discussion the committee were comfortable with Royal London’s performance.

State Street and UBS then gave presentations to the committee.

b)            State Street Global Advisors (SS)

Kevin Cullen, Senior Relationship Manager and Richard Hannam, Head of Passive Equities, Europe attended the meeting to present an update on the investments they managed on the Fund’s behalf. SS held two mandates from the Fund, both for Passive Equity Portfolios. Since inception the two portfolios had performed in line with the benchmarks, although this meant that in the third quarter the Fund had lost £13m in value.

The Committee were advised that quarter 4 had remained flat.

The Committee noted the presentation.

c)            UBS

Justin Brown, Portfolio Manager UBS Triton Fund and Steve Leech Client Relations attended the meeting to present an update on the investments they managed on the Fund’s behalf. The only change in the team was the loss of Claire Felgate who was responsible for Investor Relations. They offered to provide training for the Committee. Over the last year the fund had out-performed its benchmark, although in the last quarter they had slightly underperformed against the benchmark.

The Committee were informed of the breakdown of the Fund and what sectors were contributing to its success. The efforts since the end of 2009 had led to a significant reduction in voids with UBS Triton now being 3% lower than the benchmark. UBS felt that the future performance would continue to be strong.

The last time they had met the Committee UBS had informed the committee that they were intending to review they management fee arrangements.  These changes had been approved although the changes relating to performance fees would not be introduced until 2015. Given the poor performance of the fund in previous years no performance fee was currently being levied. The committee were given an assurance that unless the fund was performing positively no performance fee would be levied.

Over the same period the benchmark had been changed from median to weighted average.

The Committee noted the report.

d)            Miscellaneous

The Committee were advised that there were no Corporate Governance issues during the quarter.  Officers advised the Committee that cash balances had reduced compared to previous years. Members expressed concern that for the first time benefits paid out were greater than contributions received. Officers indicated that they would be looking at ways of accessing income earned from investments to boost the cash flow for 2012/13.

The Committee noted the report and asked to be kept informed of changes in the cash flow.