Download 1 - Member and Committee Information

TEESSIDE PENSION FUND
Administered by Middlesbrough Council
AGENDA ITEM 7
INVESTMENT PANEL REPORT
29 JUNE 2016
INTERIM CHIEF FINANCE OFFICER – MARK TAYLOR
PERFORMANCE REPORT
1
PURPOSE OF THE REPORT
1.1
To report on the performance of the Fund.
2
RECOMMENDATION
2.1
That Members note the report and agree to the Head of Investments carrying
out a search for a replacement to the WM Company to provide performance
monitoring reports in future.
3
FINANCIAL IMPLICATIONS
3.1
The performance of the Fund is one of the factors which the Fund Actuary
takes into account when setting the Employer's contribution rate. Costs
relating to investment management are charged directly to the Fund as a
management expense.
4
BACKGROUND
4.1
The way in which the Fund's investments perform is measured by the WM
Company, the leading provider of performance services to public and private
sector pension schemes. These results are reported to the Investment Panel
in accordance with the requirements of the Management Agreement.
4.2
Monitoring performance is one way in which Members can assess how well
the Fund is being managed. Traditionally performance has been reported in
two ways:

Firstly, the way in which the Fund has performed against other funds can
be shown in a league table. This can be comprised of other Local
Government Pension Scheme (LGPS) funds or funds of a similar size, or as
has been traditionally the case for the Teesside Pension Fund, a universe
of all funds, both public and private.

The other way of looking at performance is more tailor-made to an
individual fund. To do this an assessment is made of the mix of
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investments which would produce the sort of returns which would, over
the medium to long term, meet the liabilities of the Fund; in other words
the pension benefits payable to scheme members. From this a
benchmark can be created and the actual performance of the Fund
measured against that benchmark. The benchmark is reassessed every
three years as part of the Asset/Liability Study.
4.3
The WM Company is currently part of State Street, a US and multi-national
bank and custodian, and has clients in both the public and private sector.
State Street has decided to not continue to provide the performance
monitoring service in the UK as from March 2016. This is a sudden and
unexpected decision and leaves the Fund without a provider. Options are
available, but members may need to compromise in future on the
performance information received, e.g. percentile rankings against all Funds
and the Local Authority Funds may not be available in future.
5.
HEAD OF INVESTMENTS REPORT
5.1
2015 was another positive year for the Fund and most investors in general.
Most of the major asset classes produced positive returns, particularly UK
Property, which continued to benefit from attracting foreign investment into
London in particular, and Private Equity, which for a second year producing a
double digit return.
5.2
Bond performance was flat over the year, a contrast to the strong returns of
2014. Equities were mixed at year end, with most territories producing a
modest return. Japan performed strongest out of the major markets as
confidence grew with investors by signs of economic momentum. Emerging
markets performed poorly.
5.3
The small positive rise in most markets at the end of 2015 hides a year of
volatility, particularly in the summer and autumn months. As is often said in
the Investment Panel meetings, investors hate uncertainty, and it is this
uncertainty that causes volatility. Two areas of concern during 2015 were the
slowing economic growth rate and currency devaluation in China, and the
“will they, won’t they increase” story of US interest rates.
5.4
The asset allocation to “Alternative” investments for pension funds was again
9% of the average fund assets, and has remained at this level since 2011. This
term covers a number of different strategies, the main ones being private
equity, hedge funds, infrastructure, and commodities. The average funds
allocation is still much greater than Teesside’s allocation.
5.5
Against this background the Teesside Pension Fund continued to build up its
weightings in overseas equity and property, and took advantage of high bond
prices making significant reductions in both overseas bonds and UK index
linked bonds. In the year, a total of £23.7 million (net) was divested. Cash
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increased by £76 million to a year end amount of £150 million. The figures
below show the detail:
Purchases
Sales
Net
--------(£ millions)--------
UK Equities
Overseas Equities
Alternatives
Property
UK Bonds
Overseas Bonds
UK Index-linked
TOTAL
119.7
186.9
8.4
41.4
8.7
0
0
365.1
118.1
151.1
18.2
21.7
4.1
37.1
38.5
388.8
1.6
35.8
-9.8
19.7
4.6
-37.1
-38.5
-23.7
5.6
In summary, as the outcomes set out in Section 6 show, Fund performance
for 2015 was positive, but underperformed both the customised benchmark
and our peers. The policy of being overweight in Equities, particularly in Asia
Pacific ex-Japan, underweight in Property and Alternatives, particularly
Private Equity, and holding a higher weighting in cash, negatively affected the
Fund. The Fund has a mix of investments which differs vastly from the
average fund and is highlighted in more detail in Section 6. Members are
aware of this difference in asset allocation and have accepted that such a mix
carries the risk of greater volatility and that the Fund’s performance can
differ vastly from other funds.
5.7
One of the reasons performance measurement is important is that it enables
the Investment Panel to assess the effectiveness of the fund management
arrangements. The Fund has a regime of undertaking regular reviews of Fund
Management Arrangements. These are carried out every 5 years by the
Investment Advisors, in conjunction with the Head of Investments, with a
report for approval to the Investment Panel. The last review was approved in
March 2015.
6.
PERFORMANCE
6.1
The total Fund return for calendar year 2015 was 2.2%, against a benchmark
return of 4.1% and the average fund return of 2.9%, placing the Fund in the
62nd percentile of funds in the WM All Funds Universe, a universe made up of
public and private sector funds. (Note that 1st percentile ranking is highest,
50th percentile is median and 100th percentile is lowest ranking of
performance. This is the return for the calendar year, as is standard practice
for this report, not the financial year. The financial year’s performance result
are published in the Annual Report and Accounts.)
6.2
The most important measure of pension fund performance is over the long
term. Pension Fund investment is a long-term business. The way the Fund is
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managed looks to take the long-term view while being open for opportunities
to exploit short-term market opportunities.
6.3
The Fund’s performance over both 3 and 10 years is positive, 6.1% pa and
6.0% pa respectively. Over 3 years the Fund underperformed its benchmark
by 2.8% pa and its peers by 2.2% pa (91st percentile ranking), and over the
longer period of 10 years, the Fund has also underperformed its benchmark
by 0.2% and its peers by 0.1% pa (58th percentile ranking).
6.4
The tables and charts below show the Fund’s returns over the last 10 years
compared to the benchmark returns and the average fund returns.
Relative Performance v. Benchmark:
Fund
B’mark
Rel Pfmce
2006
11.8
10.2
1.5
2007
10.3
6.2
3.9
2008
-17.3
-16.7
-0.7
2009
21.8
16.9
4.1
2010
14.7
14.0
0.6
2011
-4.2
-.03
-3.9
2012
10.2
9.6
0.6
2013
12.5
16.4
-3.3
2014
3.8
7.4
-3.4
2015
2.2
4.1
-1.8
3 yr
6.1
9.1
-2.8
10 yr
6.0
6.3
-0.2
2015
3 yr
10 yr
2015
2.2
2.9
-0.7
(62)
3 yr
6.1
8.5
-2.2
(91)
10 yr
6.0
6.2
-0.1
(58)
Relative Performance v. Benchmark
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
-2.0
-3.0
-4.0
-5.0
Year
Relative Performance v. WM All Funds:
Fund
WM
Rel Pfmce
% Rnkg
2006
11.8
10.5
1.2
(21)
2007
10.3
7.0
3.0
(4)
2008
-17.3
-17.2
-0.1
(46)
2009
21.8
15.1
5.8
(12)
2010
14.7
12.7
1.8
(15)
2011
-4.2
3.6
-7.6
(95)
2012
10.2
8.4
1.7
(38)
2013
12.5
11.0
1.4
(53)
2014
3.8
11.7
-7.1
(97)
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Relative Performance v. WM All Funds
8.0
6.0
4.0
2.0
0.0
-2.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3 yr
10 yr
-4.0
-6.0
-8.0
-10.0
6.5
Analysing the performance further, the graph below shows the divergence in
performance between the Teesside Fund and the Average Fund. This shows
underperformance over all three time measures.
Annualised Rate of Return
9
8
7
6
5
Av Fund
4
TPF
3
2
1
0
1yr
6.6
3yr
10yr
In December 2014, the Asset/Liability Study (ALS) was reported to the
Investment Panel. The Panel were informed at that time of the differences in
asset allocation between the Teesside Fund and other Pension Funds. This is
illustrated with the asset allocation of the Fund compared to the average
fund and to the customised benchmark agreed as part of the ALS.
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Asset Allocation
120
100
80
60
40
20
0
Av Fund 2006 Av Fund 2012 Av Fund 2015
Equities
6.7
Alternatives
TPF 2006
Property
TPF 2012
Pooled Multi
TPF 2015
Bonds
Cust B'mark
Cash
The table below emphasises the difference between the average fund and
the Teesside Fund’s actual allocation and the customised benchmark as at
December 2015:
Av Fund %
Equity
Alternatives
Property
Pooled Multi
Bonds
Cash
45
9
8
1
36
1
Asset Allocation
TPF B’Mark
Diff. %
Actual TPF
%
%
70
+25
83
5
-4
2
10
+2
7
0
-1
0
13
-23
3
2
+1
5
Diff. %
+38
-7
-1
-1
-33
+4
6.8
Over the past 10 years the average fund has increased allocation to bonds
and alternatives considerably at the expense of equities. In contrast, the
Teesside Fund has shifted its allocation in the opposite direction, increasing
the allocation in equities by 14% over the past 10 years at the expense of
bonds and cash which have reduced by 11% over the same period.
6.9
For 2015, the difference in performance returns between the average fund
(2.9%) and the Teesside Fund (2.2%) was 0.7%. Explaining how this
difference occurred, the graph below shows performance for each asset class
in 2015:
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Performance Return %
15
10
5
0
Equity
Alternatives
Property
Bonds
Cash
-5
-10
Av Fund Return %
6.10
TPF Return %
From an asset allocation view, it can be clearly seen that the Fund is
underweight its customised benchmark and its peers in the best performing
asset groups (Property & Alternatives) and overweight in Equities which
performed much poorer. The above graph also shows the difference in
returns between the average fund and Teesside Fund. As well as asset
allocation decisions, stock selection decisions have impacted performance
negatively with underperformance in Equities, where the Fund is overweight,
and Alternatives. This is better illustrated in the following chart and graphs
which shows the impact on relative performance of both asset allocation and
stock selection when comparing the Fund to the average fund.
Fund
All Funds
Rel Pfmce
P’cile Rnk
Asset All.
Stock Sel.
2006
11.8
10.5
1.2
(21)
1.6
-.04
2007
10.3
7.0
3.0
(4)
0.0
3.0
2008
-17.3
-17.2
-0.1
(46)
-2.2
2.2
2009
21.8
15.1
5.8
(12)
3.7
2.1
2010
14.7
12.7
1.8
(15)
1.7
0.1
2011
-4.2
3.6
-7.6
(95)
-6.4
-1.2
2012
10.2
8.4
1.7
(38)
1.9
-0.2
2013
12.5
11.0
1.4
(53)
5.5
-3.8
2014
3.8
11.7
-7.1
(97)
-3.3
-3.9
2015
2.2
2.9
-0.7
(62)
0.9
-1.6
3yrs
6.1
8.5
-1.4
(91)
0.9
-3.1
10yrs
6.0
6.2
-0.1
(58)
0.3
-0.4
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Asset Allocation Impact
8.0
6.0
4.0
2.0
0.0
-2.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3 yr
10 yr
2014
2015
3 yr
10 yr
-4.0
-6.0
-8.0
Asset Allocation Impact
Stock Selection
4.0
3.0
2.0
1.0
0.0
-1.0
2006
2007
2008
2009
2010
2011
2012
2013
-2.0
-3.0
-4.0
-5.0
Stock Selection Impact
6.11
Carrying out the same comparison of the Fund’s relative performance to the
customised benchmark and showing the impacts from asset allocation and
stock selection performance give the following result:
Fund
B’mark
Rel Pfmce
Asset All.
Stock Sel.
2006
11.8
10.2
1.5
0.2
1.3
2007
10.3
6.2
3.9
-0.4
4.1
2008
-17.3
-16.7
-0.7
1.3
-1.9
2009
21.8
16.9
4.1
-0.1
4.0
2010
14.7
14.0
0.6
0.0
0.7
2011
-4.2
-0.3
-3.9
-3.2
-0.1
2012
10.2
9.6
0.6
-0.1
0.7
2013
12.5
16.4
-3.3
-1.1
-2.2
2014
3.8
7.4
-3.4
-2.3
-1.1
2015
2.2
4.1
-1.8
-1.0
-0.8
3yrs
6.1
9.1
-2.8
-1.4
-1.4
10yrs
6.0
6.3
-0.2
-0.7
0.4
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Asset Allocation
2.0
1.0
0.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3 yr
10 yr
2014
2015
3 yr
10 yr
-1.0
-2.0
-3.0
-4.0
Asset Allocation Impact
Stock Selection
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
2006
2007
2008
2009
2010
2011
2012
2013
-2.0
-3.0
Stock Selection Impact
6.12
Confusingly in 2015, the asset allocation strategy was not suitable to achieve
higher performance returns compared to the Fund’s customised benchmark,
but outperformed other Funds by 0.8%.
6.13
With so much of the Fund invested in Equities (83%), it is always this asset
class that determines how well the whole Fund performs. There were
regional disparities in performance during 2015. Approximately half of the
whole Fund is invested in UK and Asia Pacific Ex-Japan Equities. The returns
from these markets for 2014 were -0.6% and -3.5%. The returns from US and
European markets were 8.5% and 6.4% respectively. Only Japan (6% of the
whole Fund at the year-end) performed very well last year with a double-digit
return of 17.4%.
6.14
From Equities, the worst performing territory from stock selection was UK
Equities (-0.6%). It was reported in last year’s Performance Report that
falling iron ore and oil prices negatively impacted in 2014 as the Fund holds a
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larger than average proportion investment in companies related to these
commodities. These commodities and the companies whose business is
related to them have benefitted greatly in the past from Asian, and
particularly Chinese, demand and growth.
6.15
The Fund continues to support the position that demand and growth in Asia
remains robust over the longer term; hence the continued overweight asset
allocation to Asia Pacific ex-Japan. This comfort contributed to a continued
overweight position in commodities and oil, however these assets performed
poorly again during 2015. Some recovery has been seen in Q1 2016.
6.16
In other asset classes, the Fund has very little invested in its Alternatives, but
our Alternatives portfolio consists of Commodities, Infrastructure and
Absolute Return Funds. In this asset class the best returns were from Private
Equity (11%) and Hedge Funds (5%) – investments disliked by the Teesside
Fund.
6.17
The Fund's strategy in Alternatives is to retain a limited portfolio of
Infrastructure and Commodity assets. The benchmark is based on an
absolute return, but the portfolio is not structured to be controlled to this in
the short term. Commodity prices suffered heavily in 2015, which reflected
negatively in the stock selection return (-0.3%).
6.18
In Bonds, previous evidence that other Funds are increasing their risk in
comparison to the Fund, investing in Emerging Market Debt and higher
yielding Structured Finance and other types of Credit did not follow through
with higher returns. However, in Cash other funds reported an average
return of 1.9% compared to base rates (0.5%) and our return (0.5%). Given
Bonds and Cash are the Fund’s protection assets and the size of the amount
invested in growth assets, it is not appropriate at this time for the Teesside
Fund to follow other funds and invest with greater risk in these asset classes.
CONTACT OFFICER:
Paul Campbell
Head of Investments & Treasury Management
TEL. NO.:
(01642) 729024
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