Agenda item

As part of good governance, the Committee periodically reviews the performance of the Fund’s investments. There is a further focused review of different asset classes each quarter. This paper concentrates on Credit.

Speakers:

Lloyd Whitworth, Head of Investment and Stewardship

Anthony Fletcher, Independent Advisor

Milo Kerr, BCPP

Key points raised in the discussion:

1.    The Head of Investment and Stewardship noted the allocation of around £900 million invested in the BCPP Multi Asset Credit (MAC) Fund.

2.    The Independent Advisor noted that investments in government bonds managed by LGIM performed as expected, fixed interest gilts delivered negative returns over twelve months to 31 December. Non-government bonds and credit markets, saw reasonable returns. MAC in 2024 delivered a 7.2% return over the year, nearly 2% behind the cash benchmark but 1% above market return. Securitised assets and core manager PIMCO outperformed. Emerging market debt and high yield portfolio underperformed due to too much duration exposure and too much exposure to emerging markets which underperformed due to the strength of the dollar.

3.    The Independent Advisor clarified that on ‘un-intended asset allocation positions’, comments made in the paper were incorrect, for example MAC’s exposure to securitised credit was less overweight and not underweight as suggested by the report. On the dynamic asset allocation regarding table 3, concerning the Wellington manager he clarified that BCPP’s objective was to be overweight on high yield debt and not underweight; the data was not easy to understand. He noted that MAC performance had been below the cash + 3-4% target, duration decisions had dominated the performance. With the current narrow credit spreads it would be difficult for BCPP to recoup MAC’s underperformance. His view was for Surrey to engage with BCPP’s Chief Investment Officer and manager selection team to strengthen confidence in BCPP’s ability to deliver target returns.

4.    The Head of Investment and Stewardship explained that all the different partner funds meet to discuss the various funds every quarter via an Officers Operations Group. There was a mix of views of whether MAC should be graded two or three - one being that the fund is ‘on track’ and three being that a reviewed was needed. The final decision of that group was to grade the MAC fund as two (‘getting back on track’). There would be engagement between BCPP and partner funds to discuss their views.

5.    The BCPP representative welcomed the clarifications made regarding the errors and acknowledged the need to be clear in reporting. Over the long-term, the performance versus the cash benchmark was impacted by the slump in bond prices in 2022 after launch. BCPP would like to discuss with partner funds whether there is a role for greater flexibility. Making up lost ground must be done in a risk-controlled manner; BCPP had shifted the portfolio towards the core which is managed by PIMCO which was more dynamic. BCPP had reduced exposure to managers with interest rate sensitivity, and reduced exposure to emerging markets. MAC is well positioned to provide diversification having delivered +2% in the first quarter to date, BCPP would be working with officers through the review.

RESOLVED:

1.    Noted the Fund’s credit exposure and review from the Fund’s Independent Advisor.

2.    Endorsed the review on MAC performance, the Committee to receive an update at its next Committee meeting.

Actions/further information to be provided:

1.    5/25 - The Committee will receive an update on MAC performance at its next meeting following the review.

The Committee adjourned for a comfort break, 13.29 pm to 13.42 pm.

George Potter and Robert Hughes left the meeting during the break.