TEESSIDE PENSION FUND
Administered by Middlesbrough Council
AGENDA ITEM 5
INVESTMENT PANEL REPORT
19 SEPTEMBER 2012
DIRECTOR OF RESOURCES - PAUL SLOCOMBE
FUND MANAGER’S REPORT
1.
PURPOSE OF THE REPORT
1.1
To inform Members how the Investment Advisors’ recommendations are
being implemented.
1.2
To provide information with regard to stock selection strategies, including a
detailed report on transactions undertaken.
1.3
To present an independently produced valuation of the Fund’s assets.
2.
RECOMMENDATION
2.1
That Members note the report.
3.
FINANCIAL IMPLICATIONS
3.1
Decisions taken by Members, in light of information contained within this
report, will have an impact on the performance of the Fund.
4.
IMPLEMENTATION OF INVESTMENT ADVISORS ADVICE
4.1
The Investment Advisors reviewed the current position of the fund and
considered that asset allocation relative to the customised benchmark should
continue to prefer growth assets over protection assets. The advisors stated
that further opportunistic equity purchases in periods of market weakness may
be appropriate, in particular favouring stocks with exposure to developing
economies. Although it was felt that fixed income offered poor value at current
yields ,the advisors were not adverse to further investment in short dated
corporate issues, as a cash proxy It was also recommended that the property
portfolio could be increased with selective purchases with the emphasis on yield
and covenant.
4.2
Fund Manager’s Commentary.
After two strong reporting periods, we have had to face an inevitable soft patch.
The disappointment has been that we didn’t encounter another period of
extreme market weakness that would enable us to acquire assets aggressively
at good prices. In other words, conditions were not as awful as we had hoped.
Summary of Market Returns by Index in this Period
Key Market Index Total Returns
UK Equity (FTSE All Share)
US Equity (S&P 500)
European Equity (Eurostoxx 50)
Japanese Equity (Topix 500)
Hong Kong Equity (Hang Seng)
Australian Equity (ASX 200)
UK Gilts (FTSE All Gilt)
%Local
-2.4
-2.7
-5.2
-10.6
-3.2
-4.4
+3.8
%Sterling
-2.4
-0.8
-8.3
-5.6
-1.2
-3.8
+3.8
Source: Bloomberg LLP
5.
TRANSACTION REPORT
5.1
It is a requirement that all transactions undertaken are reported to the
Investment Panel. Appendix A details transactions from the period 1 st April
2012 to 30th June 2012.
5.2
There was net investment of approximately £13m in the period, this
compares to net investment of £9m in the previous reporting period. Cash
balances increased from £115m to £123m.
5.3
Our observations on an asset class basis are as follows:
(i)
UK Bonds
In accordance with the advisors’ comments, we continued to avoid
exposure to government fixed income. Gradually we are rolling out and
extending exposure to short dated corporate bonds.
(ii)
Overseas Bonds
Further investments were made in non core currencies, such as
Norweigan Krone, Swiss Franc and Australian Dollar. We also, for the
first time, have made a cautious initial investment in Chinese Yuan
denominated securities.
Members may recall from the previous meeting that it was reported
that we are in a programme of reviewing our externally managed
investments. One such investment was the UBS Absolute Return
Bond Fund, during the 2007/8 financial crisis the manager suffered
significant losses from exposure to various securitised debt
instruments. Clearly, the manager summarily failed to achieve the
stated aim of absolute return, although in fairness the manager
suffered no further significant losses in value after 2008. After a due
diligence process we concluded that the prospect of recovering these
losses was highly unlikely, that the manager was not giving value and
it was time to crystallise the loss. After discussing our intention with the
manager the decision was taken by UBS to wind up the fund and
return the proceeds to us.
(iii)
UK Equity
In line with Advisor recommendations we continued to seek out
opportunities to invest in periods of market weakness, favouring stocks
with growth potential in developing economies. It is an ongoing
frustration that these ‘windows of opportunity’ are so brief and
infrequent, in this case a two week period in May.
We increased our exposure to financials, favouring insurers, mining
and oil services.
(iv)
Overseas Equity
United States
Our reticence to increase US Dollar exposure in bonds is
counterbalanced by our long term goal of building out the US equity
portfolio. Our sector strategy continues to favour increasing weightings
in Oils, Utilities and Healthcare.
Europe
European markets simply watch and wait for exactly how the Euro
crisis will be resolved. As we say every quarter, it will be for Germany
to decide how much of the burden it is prepared to take to maintain
monetary union. If it does agree to backstop the monetisation of other
Eurozone nation’s liabilities the market will want to understand what
action will be taken to create lasting stability, i.e. how fiscal union will
be enforced.
Our faith in a lasting solution is weak, having sold out our last
exposure to Southern European banks.
Japan
As indicated in our previous report we opted to take a pause in view of
how strong this market had been. This proved to be a prudent move as
the market retracted some of the gains. We however offset these
reversals once again as our unhedged Yen position moved in our
favour.
A key indicator we use to gauge the health of the Japanese economy
(and to some extent manufacturing export led markets as a whole) is
the Machine Orders index. The latest monthly orders data shows a
disturbing fall of -15%. Once again Japan may end up applying further,
often ineffective, economic stimulus.
We are looking to streamline the externally managed elements of the
Japanese portfolio and increase the emphasis on in house managed
activity.
Asia Pacific
In a relatively quiet market we have increased exposure to Asian real
estate, via Hong Kong and Singaporean markets.
6.
FUND VALUATION
6.1
The Fund Valuation details all the investments of the Fund as at 30th June 2012,
and is prepared by the Fund's custodian, Northern Trust. This is attached
(Appendix B). The total value of all investments, including cash, is £2,517
million. This compares with the last reported valuation, as at 31st March 2012 of
£2,588 million.
6.2
An analysis of the summary valuation shows the Fund’s percentage weightings
in the various asset classes, compared with the Fund’s customised benchmark
and the average of Local Authority funds (per WM 31.3.12).
Asset Allocation Summary
ASSET CLASS
FUND
BENCHMARK
AVERAGE
14
18
22
UK EQUITY
38
35
27
OVERSEAS EQUITY
39
35
36
6
10
7
3
2
8
100
100
100
PROTECTION ASSETS
(BONDS AND CASH)
GROWTH ASSETS
PROPERTY
ALTERNATIVES
TOTAL
CONTACT OFFICER:
Andy Hill
Fund Manager
Tel (01642) 729023
For data sources and methodology of return calculations please call the contact officer