Agenda item

A report of the Director of Finance was presented to update the Board with information on how the Pension Fund was progressing towards its long term strategic asset allocation.

The Pension Fund’s target strategic asset allocation was set out in its Investment

Strategy Statement which was last updated in February 2019. The table at 4.1 of the submitted report showed the strategic asset allocation alongside the actual allocation of the fund at the end of the quarter the allocation was published (31 March 2019), and at the latest date reported to the Pension Fund Committee (30 September 2020).

The asset allocation to equities had remained steady at 75% for the last two years, despite the fact that the strategic allocation to equities was 50%.    The Fund had moved its allocation to the 50% target two years ago and during that time the Fund’s Advisors had consistently cautioned against investing in Bonds.   

Whilst the Fund was relatively well-funded, reducing the equity allocation would take some of the volatility out of the portfolio.    The most attractive investment currently was alternatives, private equity and infrastructure and other market investments.  An issue with those investments was that it could take a number of years to get money invested in them. 

The volatility of equity markets over the last year had also deterred the Fund from selling.   Over time, the Fund had tried to reduce its allocation through selling equity.  Over the quarter to the end of last year, the Fund sold £50 million of US equity and over the previous 18 months had sold about £150 million in US equity in total, in an attempt to release some cash for other investments and rebalance.  At the same time, the value of US equity had gone up. 

The Fund had also been working on increasing its allocation to the illiquid alternative investments.  Investments in alternatives had increased from 2.6% to 6.8% of the Fund over the past 18 month period which represented considerably progress given the necessarily slow pace of investment into this asset class.  The target allocation was 15%.

The investment team continued to work with the Fund’s advisors and managers to

ensure the required allocation to alternatives was built and maintained in an effective and efficient manner.

The Fund’s allocation to property and property debt had reduced over the 18 month period due to the following factors:

• The value of the Fund’s indirect and direct property portfolio had been adversely affected by the impact of the global pandemic and subsequent market conditions.
• The Fund had not been able to source and acquire additional property assets for its portfolio, although work continued with the property manager to locate suitable additional property assets for the Fund.   The Fund currently had 28 properties in the portfolio.
• Initial investigations into possible property debt investments were put on hold in March last year while the market was turbulent and unclear. This work would recommence and the investment team would continue to consider potential property debt investment options.

Officers had been working with the Fund’s investment advisors to review the

strategic asset allocation and a report would be presented to the next Committee meeting in March 2021.  It was suggested that the new strategy would include interim targets as well as a long term target, making it easier to measure and track against.

It was noted that Border to Coast were currently developing a Direct Property Fund and discussions had taken place as to whether the Teesside Pension Fund should move its property portfolio to Border to Coast although no decision had been reached.

A query was raised in relation to the potential for the Fund to invest in government backed bonds and it was noted that the current returns on such bonds were lower than the 4.5% annual return required by Fund to meet its liabilities.

AGREED that the information provided was received and noted.