Agenda item

A report of the Interim 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).

As at 30 September 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 34% 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. These investments were not reflected within the Border to Coast report attached at Appendix A to the submitted report but were referenced in the Border to Coast presentation later in the agenda for this meeting.

The Border to Coast report showed the market value of the portfolio as at 30 September 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 Fun’s returns were 0.13% below benchmark over the last year, or 1.13% under its overachievement target, whereas the Overseas Developed Markets Equity Fund had achieved returns of 2.39% above benchmark over the last year, comfortably above its 1% overachievement target.  Since inception, the UK fund had delivered performance of 0.83% a year above benchmark, slightly below its long-term target, and the overseas fund had 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 Teesside Pension Fund’s investment – including over the quarter and year to 30 September 2023.  Since inception the Fund was 1.50% a year behind benchmark, so 3.0% a year behind 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 as at 30 September 2023.

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 are passive and closely track the appropriate regional equity indices, the portfolio’s rating in these terms closely matched the benchmark indices ratings.

The Head of Pensions Governance and Investments commented on the reason why State Street outperformed, explaining that it was due to tax rebates.  The State Street benchmark assumed that no tax was successfully reclaimed but when it was, this came through as overperformance.

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 18 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 18 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.

It was highlighted that there was currently a Bill going through Parliament which would prevent Pension Funds from divesting from companies on the grounds of ethical reasons where it contravened UK policy.   

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 invested in.

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 would provide. 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 in some circumstances could make it more expensive for those Partner Funds that were committing a greater proportion of their assets to pooling.

As reported at the September meeting, now that Border to Coast had reached a stage where the majority of the sub-funds originally envisaged had been created, it was appropriate 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 their original agreements 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.

ORDERED that the report was received and noted.