Agenda item

Report of the Director of Finance.

The Committee received a report of the Director of Finance seeking approval of the draft Investment Strategy Statement required under the Local Government Scheme (Management of Funds) Regulations 2016.

Members were invited to make comments in relation to the Investment Strategy Statement and it was noted that Colin Robertson, Independent Adviser, had made suggestions in that paragraphs 7.13 and 7.14 be deleted.  An officer added that the Pension Board had made the following comments which would be passed to Aon Hewitt, Council’s Investment Adviser, in their upcoming strategy work:

·                     the investment strategy is expected to secure the recent gains for the Fund;

·                     ensure that expected gains and rewards were commensurate with the risks taken;

·                     re-balancing strategy;

·                     the Fund’s approach to investment in infrastructure.

The Committee agreed that the table at paragraph 7.11 be amended by officers should any technical issues be identified.  An officer informed the Committee that he was reviewing the performance targets of Pantheon’s investments and would inform the Committee of his assessment in due course.

Dave Lyons, Aon Hewitt, referred to paragraph 7.14 of the report which set out the volatility/variability in the value of assets and liabilities and suggested their consideration in terms of both absolute capital loss and also the volatility of assets versus the Fund’s liabilities.  He explained that during crises in the financial markets, and under the actuarial valuation approach utilised, it was possible that assets could decrease in value whilst liabilities could increase in value.  This flight to quality and the resulting fall in government bond yields would potentially increase the funding shortfall in the Fund.  Paragraph 7.13 was less intuitive and changes in the value of the Fund’s overseas investments would also be affected if sterling weakened or strengthened relative to the other major global currencies. In order to protect against this it is possible to passively currency hedge overseas investment exposure which would largely remove the currency element in the overseas investment and reduce this risk.  He added that expected returns would also reduce due to the intricaciesof the currency hedging market and that rolling the currency hedging program would be a better option.  Colin Robertson noted that the Fund has a partial currency hedging program in place and Dave Lyons observed that this will have somewhat held back the investment performance of the overseas investments given the recent fall in sterling relative to the other major global currencies, but that this situation could be expected to reverse if and when sterling strengthened.

In response to questions, Dave Lyons stated that the level of currency hedging employed currently was appropriate and that it would be difficult to pre-empt how currency markets would react to international events moving forward.  A reference to asset/liability modelling would be included in the Investment Strategy Statement following the investment strategy review to be submitted to the June 2017 meeting of the Committee.

Richard Romain, Independent Adviser, suggested that an Executive Summary would be helpful and it was

RESOLVED:  That the draft Investment Strategy Statement be approved, subject to:

(1)          the inclusion of an Executive Summary;

(2)          the table at paragraph 7.11 being amended by officers should any technical issues be identified;

(3)          paragraphs 7.13 and 7.14 being deleted.