Agenda item

A report of the Director of Finance was presented to provide Members with quarterly investment reports in respect of funds invested externally with Border to Coast Pensions Partnership Limited (Border to Coast) and with State Street Global Advisers (State Street).   The report also provided Members with details of proposed changes to:

•           The method Border to Coast used to apportion its costs between its investors (the Partner Funds).

•           The benchmarks State Street used for their passive equity funds.

As at 30 June 2023 the Fund had investments in the Border to Coast UK Listed Equity, Overseas Developed Markets and Emerging Markets Equity Funds.  For all three sub funds the return target was expected to be delivered over rolling 3 year periods, before calculation of the management fee.  The Fund also had investments in the Border to Coast Private Equity sub-fund and the Border to Coast Infrastructure sub-fund.  To date, total commitments of £900 million had been made to these sub-funds (£500m to infrastructure and £400m to private equity) with around 33% of this commitment invested so far.  In addition, a commitment to invest £80 million over a three year period to the Border to Coast Climate Opportunities Fund

had been made.

The Border to Coast report showed the market value of the portfolio at 30 June 2023 and the investment performance over the preceding quarter, year, and since the Fund’s investments began.  Border to Coast had also provided additional information within an appendix to that report in relation to the Overseas Developed Markets Equity Fund, giving a breakdown of key drivers of and detractors from performance in relation to each of its four regional elements.  Market background information and an update of some news items related to Border to Coast were also included.  Border to Coast’s UK Listed Equity Fund had achieved returns of 0.80% above benchmark over the last year, just under its 1% overachievement target, whereas the Overseas Developed Markets Equity Fund had achieved returns of 2.35% above benchmark over the last year, comfortably above its 1% overachievement target.  Since inception, the UK fund had delivered performance of 0.93% a year above benchmark, slightly below its long-term target, and the overseas fund has delivered performance of 1.49% above benchmark, above its long-term target.  The performance of the Emerging Markets Equity Fund had been below benchmark throughout much of the period of the Fund’s investment – although performance over the quarter and year to 30 June 2023 was above benchmark, albeit still below the 1.5% over benchmark target.

State Street had a passive global equity portfolio invested across four different region tracking indices appropriate to each region.  The State Street report, attached at Appendix B to the submitted report, showed the market value of the State Street passive equity portfolio and the proportions invested in each region at 30 June 2023.  Performance figures were also shown in the report over a number of time periods and from inception – the date the Fund started investing passively with State Street in that region. 

State Street continued to include additional information with their report this quarter, giving details of how the portfolio compared to the benchmark in terms of environmental, social and governance factors including separate sections on climate and stewardship issues.  As the State Street investments were passive and closely tracked the appropriate regional equity indices, the portfolio’s rating in these terms closely matched the benchmark indices ratings.

The latest report showed performance of the State Street funds against the revised indices – excluding controversies (UN Global Compact violators) and excluding companies that manufactured controversial weapons. As expected for a passive fund, performance closely matched the performance of the respective indices.

State Street had recently advised that it would be making further changes to its passive equity indices and would be excluding additional sectors.  The Fund had been notified that from 18th December 2023 the benchmarks of the State Street Sub-Funds the Fund invested in would apply screens to exclude certain securities related to Tobacco and Thermal Coal.  Excluded companies would be any involved in production of tobacco or tobacco products and companies that extract thermal coal or have thermal coal power generation and this activity represented 10% or more of revenues. This was in addition to the current screening for UN Global Compact Violations and Controversial Weapons which came into effect on 18th November 2020.  Initial indications were that across the four State Street Sub-Funds these changes would cover around 0.36% of the current assets (tobacco) and 0.88% of the current assets (thermal coal) that the Fund invested via State Street.

A Member asked whether, by excluding companies, the Pension Fund could potentially be in breach of new legislation in the Boycotts, Divestment and Sanctions Bill.  The Head of Pensions Governance and Investments commented that it would probably not have a significant impact on how the Fund chose to operate or invest, although he had not seen any detailed guidance.    Teesside Pension Fund  did not normally exclude companies but preferred to work with them. 

It was highlighted that the Fund used State Street as its equity manager as it enabled the Fund to have the right regional allocation.  If the Fund felt that the advantages were outweighed by the changes to the index, it would need to take a view on that. 

Another Member was pleased to note State Street’s decision to divest from tobacco and it was calculated that the amount currently invested was approximately £18 million.

Appendix C to the submitted report contained the latest available ESG and carbon exposure in relation to the three Border to Coast listed equity sub-funds the Fund invests in: UK Listed Equity, Overseas Developed Markets Equity and Emerging Markets Equity.  Amongst other information, the reports included information on the highest and lowest ESG-rated companies within those Border to Coast sub-funds, together with an analysis of the carbon exposure of the sub-funds on a number of metrics. The sub-funds’ ESG position and carbon exposure was also compared to benchmarks representing the ‘average’ rating across the investment universe of that particular benchmark.

When Border to Coast was established over 5 years ago its Partner Funds set out an approach to apportion the costs of setting up and running the different investment propositions (sub-funds) Border to Coast provided.   To ensure adequate funding for each of the new propositions, the initial cost-sharing approach included apportioning some ongoing management charges based on the assets Partner Funds had identified as likely to transfer into the pool.  Whilst it was acknowledged that over time charging most costs on an ‘assets under management’ basis would be fairest, at the outset this would cause anomalies and might in some circumstances make it more expensive for those Partner Funds that were committing a greater proportion of their assets to pooling.

Now that Border to Coast had reached a stage where the majority of the sub-funds originally envisaged had been created, it was an appropriate time to revisit the way costs were apportioned.  Over the next few months Partner Funds (or their administering authorities) would be asked to agree to make some changes to the agreements that set up Border to Coast to allow cost apportionment from the coming year to be based primarily on an ‘assets under management’ basis. This would not change the costs that Border to Coast charges, it would just apportion them differently – in a way that more fairly represented how Partner Funds were invested.  More information on the proposed change was shown in the briefing note recently shared with the Border to Coast Officer Operations Group (OOG), a copy of which was attached at Appendix D to the submitted report.

ORDERED that the information provided was received and noted.