Agenda item

Report attached.

Officers advised the Committee that the net return on the Fund’s investments for the quarter to 31 December 2012 was 3.0%. This represented an out performance of 0.7% against the combined tactical benchmark and an outperformance of 2.5% against the strategic benchmark. The overall net return for the year to 31 December 2012 was 10.5%. This represented an out performance of 1.3% against the annual tactical combined benchmark and an out performance of 4.4% against the annual strategic benchmark.

The Committee were advised that the global economic data showed signs of stabilisation, particularly in the US and China; the Eurozone economy remained mixed. The re-election of President Obama in November offered some clarity politically but markets fell sharply in the immediate aftermath as the focus shifted to the approaching ‘fiscal cliff’ debate. The fourth quarter was positive for UK equities.

Index linked gilts returned 4.3% during the quarter, reflecting increased demand for longer dated bonds and outperformed fixed interest gilts.

1.    Hymans Robertson (HR)

HR advised the Committee that despite unresolved difficulties associated with the financial crisis, in particular the debt ‘overhang’ in the US and Europe, equity markets performed well during the quarter. This positive tone contrasted with notes of caution regarding the global economy.

Forecasts for global economic growth in 2013 were cut by a number of respected agencies. Policy makers made conciliatory comments and prepared for the worst. In the US, the central bank announced its intention to keep short-term interest rates at close to zero until specific economic criteria were met and extended the programme of asset purchases which started in November 2008.

In the UK, Chancellor George Osborne had presented the autumn statement in early December. Due to lower than expected economic growth, austerity measures were to be prolonged to at least 2018 and the timescale for debt reduction extended. During the quarter, both the Bank of England and the Office for Budget Responsibility had cut their forecasts for economic growth for both 2012 and 2013. The Governor of the Bank of England had forecast a period of persistently low economic growth, citing problems in the Euro zone as a contributory factor.

Key events during the quarter were:

Global Economy

·         UK had emerged from recession, as the economy expanded during the three months to end September, although the Euro zone returned to recession;

·         The pace of growth of Chinese economy had edged higher after nearly two years of slowdown;

·         Short-term interest rates in UK, US and Euro zone were held at current levels;

·         European finance ministers had agreed a new supervisory regime for Euro zone banks;

·         Standard and Poors had placed UK’s AAA credit rating on negative outlook.

Equities

·         Rosneft (Russia) had replaced Exxon Mobil as the world’s largest publicly traded oil producer;

·         The strongest sectors relative to the ‘All World’ Index were Financials (+5.4%) and Industrials (+2.9%);

·         the weakest were Telecommunications (-6.7%) and Technology

(-6.0%).

·          

Bonds

·         The ECB announced a bond purchase programme to assist countries struggling to raise funds;

·         Index linked gilts (+4.3%) had outperformed fixed interest gilts (-0.4%) by a significant margin.

In the US, the administration had avoided the immediate threat posed by fiscal ‘cliff’ but difficult budget negotiations lay ahead. Spending cuts were inevitable and would be decided by a complex mix of political and economic criteria.

The Committee were advised of the performance of the various Investment managers during the quarter. Further details were available in the confidential minutes.

2.    Baillie Gifford (BG)

Fiona MacLeod, Client Services Manager and James Mowat, Client Services Director attended the meeting to deliver a presentation on the performance of the funds BG managed on the Pension Funds behalf. BG advised the Committee that since 28 February 2013 when the value of the fund stood at £74.5m it had increased in value to £75.6M.

The target for BG was to outperform the MSCI AC World Index by 2.0 – 3.0% per annum (gross) over rolling five year periods. Baillie Gifford had been appointed on 25 April 2012 and since inception to 31 December 2012 had outperformed the benchmark by 0.1%, a return of 5.5% (net) compared to the benchmark of 5.4%

Fiona and James proceeded to give the Committee a brief preview of the portfolio and how this was managed.

The Committee noted the presentation and thanked Fiona and James for their presentation.

3.    Standard Life (SL)

Dale MacLennan, Investment Director, Global Client Relationship Management attended the meeting to deliver the presentation. He tendered apologies on behalf of his colleague David Cumming who was unwell.

At the end of December 2012 the value of the fund managed by Standard Life stood at £78.8m, by the end of January 2013 it had risen to £84.4m. The most significant growth had been in UK Equities. By the date of the meeting the fund had seen a further rise to approx. £88m.

Dale informed the Committee of the decisions taken by Standard Life to manage the fund and advised that in his opinion whilst momentum had slowed down at the back end of 2012, he believed it was picking up again this year.

The Committee noted the report and thanked Dale for his presentation.

4.    Royal London Asset Management (RLAM)

Paul Rayner, Head of Government Bonds and Fraser Chisholm, Client Account Manager delivered the presentation on behalf of RLAM. The objective for the fund was to outperform the composite benchmark by 0.75% p.a. (net of fees) over rolling three year periods.

At 30 September 2012 the value of the fund stood at £91.69m, this had risen to £94.83m by 31 December 2012. In the last 3 year period the manager had outperformed the objective by 0.7%.

The Committee noted the report and thanked Fraser and Paul for their presentation.