Agenda item

Report attached.

Officers advised the Committee that the net return on the Fund’s investments for the quarter to 30 June 2012 was -2.3%. This represented an under performance of -1.1% against the combined tactical benchmark and an under performance of -9.1% against the strategic benchmark. The net return for the year to 30 June 2012 was 0.3%. This represented an underperformance of –1.8% against the annual tactical combined benchmark and an under performance of -23.4% against the annual strategic benchmark.

The Committee were advised that after a strong start to the year UK Equities had fallen in the second quarter. In a volatile quarter the Eurozone crisis and signs of slowing global economical growth undermined market confidence and investors sought for[L1]  safety. Political turmoil in Greece, banking problems in Spain and a change of Government in France added to market uncertainty. There had been no change in UK interest rates at 0.5% and inflation was continuing to fall.

a ) Hymans Robertson (HR)

HR advised the Committee that an intriguing mix of political, economic and financial factors had contributed to a sense of crisis throughout the quarter. Political uncertainty in Greece, and the burden of debt in certain European nations (particularly Spain and Greece), had threatened the viability of the Euro which, not for the first time, seemed close to ‘collapse’. The newly elected President of France had challenged the established consensus on how to deal with difficulties in the Eurozone, by promoting a switch in emphasis from austerity to growth.

The deteriorating global economic backdrop had offered little solace to investors, with the UK, and much of Europe, falling into recession, mixed data in the US and reduced activity in China. Nevertheless, the difficulties of the Eurozone were widely cited as the greatest threat to global economic activity.

In the UK, the Bank of England had cut its economic growth forecast for 2012, from 1.2% to 0.8%. This compared with an average of 0.3% made by ‘independent’ forecasters and just 0.1% by the British Chamber of Commerce. In June, the Chancellor of the Exchequer had announced a £100bn support programme for the economy, with a ‘funding for lending’ scheme at its core. The Governor of the Bank of England had hinted that short-term interest rates might be cut to zero, in order to stimulate the economy.

Key events during the quarter were:

Global Economy

·        EU had agreed €100bn ‘bailout’ facility for Spanish banks.

·        Ratings agencies had cut credit ratings of UK, European and US banks.

·        Short-term interest rates had remained unchanged in the UK, US and Eurozone.

·        China had cut key interest rate on concerns over prospects for economic growth.

·        France, Germany, Italy and Spain had agreed €130bn economic growth package.

Equities

·        Equities were highly volatile, reflecting the ebb and flow of economic and financial news.

·        The strongest sectors relative to the ‘All World’ Index were defensives - Telecoms (+8.4%) and Health Care (+7.3%); the weakest were cyclical - Basic Materials (-6.3%) and Oil & Gas (- 3.7%).

Bonds

·        Yields on UK, German and US government bonds had reached record lows in early June on continued flight to safety.

·        Borrowing costs for Spain and Italy had risen to levels not sustainable in the long term.

The bailout of Spanish banks and other ‘rescue’ packages had dealt effectively with the immediate crisis in the Eurozone. The longer term outlook remained uncertain. Much depended on the recently agreed EU fiscal treaty and proposed Europe-wide banking supervision.

HR advised the Committee of the performance of the individual Fund managers. Details are available in the exempt minutes.

b ) Royal London (RLAM)

Paul Rayner (Head of Government Bonds) and Fraser Chisholm (Client Services Manager) attended the meeting to deliver a presentation on their performance in Quarter 1. Details are available in the exempt minutes.

c ) Standard Life (SL)

David Cumming (Executive Director, Head of Equities) and Dale MacLennan (Investment Director, Global Account Management) attended a meeting to deliver a presentation on their performance in Quarter 1. Details are available in the exempt minutes

d ) Miscellaneous

The Committee noted:

1.      Hymans’ performance monitoring report and presentation;

2.      the presentations from the Funds UK Equities Manager (Standard Life) and the Funds Investment Grade Bonds Manager (Royal London);

3.      the summary of the performance of the Pension Fund as set out in the report;

4.      the quarterly reports provided by each Investment Manager;

5.      that there were no Corporate Governance issues arising from the voting as detailed by each manager;

6.      that UBS have appointed a new portfolio Manager – Howard Meaney who had joined the team on 17 September 2012; and

7.      that there would be no further draw downs of funds to supplement the cash balances pending the outcome of the Investment Strategy Review.