PENSION FUND PANEL 20 NOVEMBER 2013 FUND VALUATION …

[Pages:14]PENSION FUND PANEL 20 NOVEMBER 2013

FUND VALUATION AND PERFORMANCE

REPORT BY THE HEAD OF FINANCE ? STRATEGY & ACCOUNTING

SUMMARY

This report considers the investment performance of the Fund to the end of September 2013 and the performance of each portfolio over a three year rolling period. A commentary from each of the fund managers outlining their investment performance during the quarter to 30 September 2013 is appended to this report.

The value of the Fund at 30 September 2013 was ?514.66 million which includes ?18.6 million invested internally by RBK. This is an increase of just over ?11 million from the value at the end of June 2013 and reflects an improvement in the global equity market returns during the third quarter of 2013.

Action proposed by the Lead Member for Finance and Resources It is proposed that the Panel consider the latest performance information and direct its questions to Henderson and Schroders accordingly.

Reason for action proposed To review the performance of the Pension Fund's investments.

SUMMARY

1. The manager structure at inception with benchmarks and performance targets is detailed below.

Manager Fidelity

% share of Total Fund

Benchmark index

Annual Performance target above benchmark

35.9% MSCI All Countries World Index

1.5?2.0% pa

Threadneedle

23.8% MSCI All Countries World Index

2.5-3.0% pa

Schroders

19.4% MSCI All Countries World Index

Hendersons ASC (All Stocks Credit) Hendersons TRB (Total Returns Bond)

9.5% iBoxx All Stocks Non-Gilts index

3.9%

No benchmark

UBS

3.8%

IPD All Properties index

NB: 3.6% held as cash and invested internally

3.0% to 4.0% pa

0.5% pa

6% pa over 3-5 years with volatility of 4 to 7% Outperform IPD index

CURRENT COMPOSITION OF THE FUND

2. The composition of the Fund, by manager, as at 30 September 2013 and a comparison with 2012 is shown below.

3. The strategic asset allocation benchmark for the Fund (as outlined in the Pension Fund's current Statement of Investment Principles) and the actual split as at 30 September 2013 is given below:

Asset Class

Equities Bonds Property Cash Total

Allocation Benchmark

80% 15% 5% 0% 100%

Allocation as at 30 September 2013

79.17% 13.41% 3.80% 3.61% 100%

4. The higher allocation to cash is being held ready to invest into the new Diversified Growth Funds (DGF) which in progress and is reported elsewhere on this agenda.

5. The lower allocation to property is still mostly attributed to the write down of the UBS Triton Property Fund.

IN HOUSE CASH

6. The amount of cash held and invested internally as at 30 September 2013 totalled ?18.6m. At that time, approximately 14% of these funds were held in the Pension Fund's Special Interest Bearing Bank Account (SIBA) and a nominal amount was held in the Pension Fund's current bank account to meet daily cashflow requirements. Both accounts are held with Natwest Bank.

7. The remainder of the funds were invested in four Fixed Term Deposits (FTDs) with two of the Council's approved counterparties. These were due to mature between October and December 2013. Details relating to those FTDs which have matured since 30 September are outlined in paragraph 21.

VALUATIONS AND PERFORMANCE TO 30 SEPTEMBER 2013

8. A commentary from each fund manager on performance for the quarter to 30 September 2013 is appended to this report. The Investment reports for the quarter ending 30 September 2013 will be distributed to the members of the Panel with the agenda for this meeting.

9. Henderson and Schroders will report at the meeting and provide an update to the end of September 2013, together with any significant changes since that date. A list of suggested areas on which to focus the Panel's questions to the managers is included at Appendix G (exempt information).

10. The market value of the Fund's Investments at 30 September 2013 was ?514.66 million. This is an increase of just over ?11 million from the value at the end of June 2013 and reflects an improvement in the global equity market returns during the third quarter of 2013. The movement in the equity benchmark index (MSCI All Countries World Index) over the previous quarters demonstrate this point

(Figures provided by WM Performance Services)

Quarter

2012 Q4 2013 Q1 2013 Q2 2013 Q3

Equity Benchmark index % +2.2

+14.0 -0.3 +1.1

ANNUAL PERFORMANCE FOR YEAR TO 30 SEPTEMBER 2013

11. The quarterly valuations of the total Pension Fund over the last year is shown in the following table:

Date

30 Sept 2012 31 Dec 2012 31 Mar 2013 30 Jun 2013 30 Sept 2013

Value of Fund (?m) 435.6 446.5 503.0 503.6 514.7

12. The performance of each of the managers in the year to 30 September 2013, compared with both the benchmark index and the outperformance target set is shown in the table that follows:

Manager

Value @ 30 Sept 12 ? million

Value @ 30 Sept 13 ? million

Fund return for year to Sept 2013

Benchma rk return for year

to Sept 2013

Outperforman ce Target return to Sept 2013

Performan ce relative

to Benchmar

k

Performan ce relative to target

Fidelity Threadnee

dle

Schroders

?155.72 ?100.42 ?82.03

?184.88 ?122.63 ?99.96

18.8% 22.1% 21.8%

17.4% 17.4% 17.4%

18.9% 19.9% 20.4%

1.4% 4.7% 4.4%

-0.1% 2.2% 1.4%

Henderson ASC

Henderson TRB

UBS

?67.16 ?0.00 ?20.42

?49.09 ?19.94 ?19.58

2.9% n/a -1.6%

2.9% 6.0% 4.2%

3.4% >6.0% >4.2%

0.0% n/a -5.8%

-0.5% n/a

-5.8%

In House Cash

?9.81 ?18.58

Total

?435.56 ?514.66

(Fund Manager valuations provided JP Morgan. Performance data provided by WM Performance Services)

13. All of the equities fund managers performed better than the benchmark over the year. Both Threadneedle and Schroders outperformed their targets over this time by 2.2% and 1.4% respectively. Fidelity narrowly missed meeting their target by just 0.1%.

14. Both funds held with the bonds manager, Henderson, are listed although there will be no performance data for the new Horizon Total Returns Bond to report yet as the investment began in June 2013. The All Stocks Credit Fund met the benchmark return over the year exactly but failed to meet their outperformance target.

15. The performance of all the managers is shown graphically below. The Horizon TRB Fund has not been included.

MANAGERS' PERFORMANCE ON A ROLLING 3 YEAR PERIOD TO 30 SEPTEMBER 2013

16. The targets for each of the Fund managers are based upon outperforming the benchmark index over a rolling three year period. The table below shows the three year annualised performance of all the fund managers to the end of September 2013.

Manager Fidelity

Inception date

Associated Benchmark

Return

(3 years, annualised)

%

Performance Target above

Benchmark

(annualised) %

Actual Performance

(time weighted return, 3

years, annualised)

%

Comparison with

Benchmark

(time weighted return, 3

years, annualised)

%

Comparison with

Target

(time weighted return, 3

years, annualised)

%

Sep-09

9.2

+ 1.5 to 2.0

9.8

0.6

-0.9

Threadneedle Sep-09

9.2

+ 2.5 to 3.0

10.8

1.6

-0.9

Schroders Sep-09

9.2

+ 3.0 to 4.0

8.9

-0.3

-3.3

Hendersons ASC

Sep-09

6.0

+ 0.5

6.4

0.4

-0.1

Hendersons TRB

Jun-13

6.0

> 0

n/a

n/a

n/a

UBS

Aug-07

4.2

> 0

2.7

-1.5

-1.5

17. The Henderson Horizon TRB is not measured against an index but has a target to achieve a return of 6% per annum over 3 to 5 year period with volatility of 4-7%. In the quarter ending 30 September 2013, the return on this portfolio was 0.5%.

18. The performance of all managers is shown graphically below.

19. This indicates that over the three year period, none of the fund managers have achieved their targets set although the Hendersons ASC Fund, narrowly missed the outperformance target by just 0.1%. In addition to the Hendersons ASC, both Fidelity and Threadneedle outperformed the benchmark index over the latest rolling three year period. The pooled equities manager, Schroders, failed to meet the benchmark over the three years rolling period, although the gap has narrowed since the previous quarter (-0.7% to -0.3%). The underperformance demonstrated by UBS over the 3 years has resulted from the write-down as previously mentioned.

DEVELOPMENTS SINCE SEPTEMBER 2013 20. The latest finalised valuation of the Pension Fund as at 31st October 2013 was not

available at the time of writing this report. 21. During October two Fixed Term deposits each of ?5 million matured. One of these

has been rolled over for a further month and the other was not renewed but repaid into the Pension Fund's SIBA account with NatWest. These deposits are being held pending investment with the two recently appointed Diversified Growth Fund (DGF) managers once the various legal and other formalities are completed (see report elsewhere on this agenda). ACTION TAKEN AND PROPOSED 22. The Panel has recently appointed two DGF managers, and approved the transfer of 5% of the Fund's assets to each. A report elsewhere on this agenda sets out the approach to funding this allocation ? partly by using the Fund's surplus cash, with the balance being met by reducing the allocation to equities. 23. The fixed income market will be kept under review ? a report on the events which may require a further realignment of the Fund's fixed income holdings is elsewhere on this agenda. 24. The 2013 Actuarial valuation process is still to be concluded. Once the results are finalised, the Panel will be required to approve a new "Funding Strategy Statement". At that point it will be appropriate to reconsider whether the Fund's strategic asset allocation remains appropriate, and if further changes are proposed, whether this

should be achieved by adjusting the assets allocated between the Fund's current managers, or whether further manager procurements are appropriate.

BACKGROUND PAPERS

Held by: Jeremy Randall - Head of Finance, Strategy & Accounting Tel: 020 8547 5572 (author of report) E-mail: jeremy.randall@rbk..uk

?

Fund valuation reports.

List of Annexes

ANNEX 1 ANNEX 2 ANNEX 3 ANNEX 4 ANNEX 5

Commentary from Fidelity Commentary from Threadneedle Commentary from Schroders Commentary from Henderson Commentary from UBS

ANNEX 1

Royal Borough of Kingston upon Thames Pension Fund Performance to 30 September 2013

Performance Summary For the third quarter of 2013, the Portfolio outperformed the benchmark. Health Care and Consumer Discretionary were among the largest sector contributors to relative performance, while the Financials and Utilities sectors detracted.

Portfolio Details In the Health Care sector, the overweight's in drug makers Onyx Pharmaceuticals, Biomarin Pharmaceuticals, and Gilead Sciences were among the largest Portfolio contributors. Shares of Onyx Pharmaceuticals rose sharply after the company was acquired by Amgen for $10.4 billion. Shares of Biomarin rose as the company posted strong second-quarter earnings, driven by betterthan-expected sales of key drugs. Gilead shares hit an all-time-high during the quarter helped by news that the Food and Drug Administration had decided to put on hold tests for certain dosages of Vertex Pharmaceutical's hepatitis C drug. The decision helped boost Gilead which has been in competition with Vertex to develop a hepatitis C treatment. In the Consumer Discretionary sector, the overweight's in gaming company Las Vegas Sands and media and television entertainment company Viacom were among the largest Portfolio contributors. Shares of Las Vegas Sands rose as the company reported second-quarter earnings that beat consensus estimates, driven by solid results at its Macau based properties. Viacom shares rose as the company posted strong thirdquarter earnings, driven by better-than-expected advertising revenue and improved ratings from its Nickelodeon network. The company also announced that it was doubling its share buyback program to $20 billion. Among individual holdings, the underweight in telecom services provider AT&T was among the largest Portfolio contributors. AT&T shares declined as the company announced second-quarter earnings that missed consensus estimates, driven by weaker-thanexpected margins.

In the Financials sector, the underweights in banking and financial services providers Banco Santander and Banco Bilbao were among the largest Portfolio detractors. Shares of Banco Santander rose as the company reported a sharp rise in second-quarter earnings compared to the same period a year earlier, as lower write-downs offset weakness in Santander's Brazil segment. Shares of Banco Bilbao rose as the company posted a rise in second-quarter earnings, driven by lower loan losses and asset sales. In the Utilities sector, the overweight's in utility providers PG&E and Kansai Electric Power detracted from relative performance. PG&E shares declined amid negative investor sentiment due to the ongoing regulatory uncertainty surrounding the company as a result of the San Bruno Pipeline explosion. Shares of Kansai Electric Power declined amid investor concerns that there may be delays in restarting some of Kansai's nuclear reactors that were damaged during the Japanese earthquake and tsunami.

Among individual holdings, the overweight's in drug maker Sanofi and home improvement retailer Home Depot were among the largest Portfolio detractors. Sanofi shares declined as the company posted second-quarter earnings that missed consensus estimates, driven by lower-than-expected sales of key drugs. Despite reporting second-quarter earnings that topped consensus estimates,

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