Agenda item

The Fund’s officers and advisors have been engaging with Border to Coast Pensions Partnership (BCPP) to better understand the investment philosophy, process and people behind the Alpha fund range after sustained underperformance against both the benchmarks and targets. 

Speakers:

Mel Butler, Deputy Head of Investment and Stewardship

Steve Turner, Mercer

Neil Mason, LGPS Senior Officer

Anthony Fletcher, Independent Advisor

Milo Kerr, BCPP

Key points raised in the discussion:

1.    The Deputy Head of Investment and Stewardship noted that after a sustained period of underperformance, the Committee recommended that a review of the Alpha fund take place and the performance figures were shown in the report.

2.    The Mercer representative stressed that BCPP was due to enact changes to the Alpha fund. There were structural issues regarding its management, the underperformance was large and long-standing. He noted the performance issues in other funds such as the UK and emerging markets funds. Regarding the Alpha fund’s underperformance, he detailed three key factors: portfolio construction, manager selection and risk management.

3.    The Mercer representative outlined the current position and the alternative options that could be taken. He noted that the recent government proposals on the future of the LGPS around how the Fund would take advice from and implement through BCPP was a complication.

4.    The LGPS Senior Officer referred to the consultation, noting that LGIM Future World fund was currently considered as being under pooled management, in the future the decision on the level of granularity of asset allocation would be made by BCPP. The Mercer representative noted the need to be mindful of incurring transaction costs should the decision be made to move away from the fund.

5.    The Chairman noted that a mix of the options could be chosen.

6.    The Independent Advisor felt that BCPP had not been willing to accept the portfolio construction issue. He noted concern that the direction of travel from the consultation would make it difficult for the Fund to address the underperformance.

7.    The BCPP representative noted Mercer’s fair assessment, it had been a difficult operating environment for active managers but a manager could have identified the issues driving underperformance, that was a gap and BCPP was working to review the options. Partner funds had different appetites for active risk; BCPP was considering the wider aspects of operational management.

8.    A Committee member asked what management oversight there was to ensure that if the wrong decisions were being made, then actions would be taken more quickly to address them. The BCPP representative explained that changes made at the manager level by the Investments Team required approval by the Investment Committee which was chaired by BCPP chief executive. There was regular monitoring, and a deep dive annual review into the funds’ structures.

9.    The Mercer representative noted that it sounded as though that process had been in place for several years and he queried whether that would change in the future as BCPP took a long time to recognise that change needed to be made. The Independent Advisor noted that the processes in place were not leading to change, the small cap value bias at inception had not been addressed. The BCPP representative noted that BCPP was committed to a review of the risk management tools available to the Investments Team and speed of implementation.

10.  A Committee member welcomed BCPP’s review, however he noted that the Fund could not afford to wait and it would be helpful for a detailed analysis of the alternative options to be undertaken. The Chairman noted that would be included in the report to March’s Committee meeting. The LGPS Senior Officer noted that the Fund was an owner and customer, it would continue to take a partnership approach.

11.  A Committee member asked how the expected changes by BCPP would be communicated. The LGPS Senior Officer explained that would be covered in March’s Committee report and he would also cover in his regular email updates to the Committee and Board.

RESOLVED:

1.    Noted the report from the Investment Consultant on the BCPP Global Equity Alpha fund.

2.    Approved the proposed next steps in this paper.

Actions/further information to be provided:

1.    A18/24 - The LGPS Senior Officer will include BCPP’s changes in his regular email updates to the Committee and Board.

Duncan Eastoe left the meeting at 13.11 pm.