WEST YORKSHIRE PENSION FUND ADMINISTERED BY THE CITY OF BRADFORD METROPOLITAN DISTRICT COUNCIL THE INVESTMENT ADVISORY PANEL STATEMENT OF GENERAL APPROACH TO THE MANAGEMENT OF PENSION FUND INVESTMENTS April 2017
CONTENTS Introduction 3 Fund Statistics 4-5 Objectives of Investment 6 Powers of Investment 7 Responsibilities of the Investment Advisory Panel 8 Activity between Meetings 9 Responsibilities of In-House Investment Section 10 Approach to Investment 11-14
INTRODUCTION 1. The City of Bradford Metropolitan District Council, as administering Authority, became quasi-trustee of the West Yorkshire Pension Fund on 1 April 1986. 2. The responsibilities of the administering authority on investment matters relating to the Fund are laid down in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 as amended. The administering authority must have regard to: 2.1 the need for diversification of investments; 2.2 the suitability of particular investments and types of investment; 2.3 proper advice obtained at reasonable intervals about their investments. 3. The City of Bradford Metropolitan District Council s Governance and Audit Committee has established an Investment Advisory Panel to which the Council has delegated this responsibility. 4. The City of Bradford Metropolitan District Council relies on the Investment Advisory Panel to determine the strategy for investment. 5. The proper advice that must be sought is the advice of persons who are reasonably believed to be qualified by their ability in and practical experience of investment matters. This includes the Director, senior staff in the Investment Section and the independent advisors to the Fund. 6. It is of paramount importance that the administering authority, and the Panel, exercises its responsibilities impartially in the best interests of the Fund. - 3 -
FUND STATISTICS 7. At 31 March 2017, the market value of investments held by the Fund amounted to 13.534million*. The breakdown of the Fund over the various sectors was: ASSET CLASS MARKET VALUE Million Total Equities 9507 UK Equities 4380 Overseas Equities 5127 N America 1458 Europe (Ex UK) 1489 Japan 719 Asia Pacific (Ex Japan) 548 Emerging Markets 913 Total Bonds 1869 UK Govt Bonds 507 UK Govt Index Linked 579 UK Corporate Bonds 453 Global Bonds 330 Private Equity (PE) Fds 660 PE Infrastructure 290 Property 593 Hedge Funds 254 Listed Alt UK 189 Cash 172 Total 13,534 * Unaudited figure - 4 -
The market value of the Fund has grown to its present level from 63 million at its inception in 1974. The market value at the end of the previous 5 years was as follows:- Market Value of Fund m 31 March 2012 8,719 31 March 2013 9,865 31 March 2014 10,369 31 March 2015 11,255 31 March 2016 11,163 8. The annual revenue surplus of the Fund i.e. the amount of new cash available for investment each year is currently estimated at 200million. That is to say, contributions plus investment income minus benefits paid out equate to new cash in the Fund of about 200 million each year.. - 5 -
OBJECTIVES OF INVESTMENT 9. The principal objective of the investment of pension fund monies is to ensure that the assets of the Fund and the future flow of income are sufficient to meet all liabilities at the least possible cost to the employing authorities and the pension scheme members. 10. To attain this objective, arrangements must be made for the optimum investment of all monies accruing to the Fund and for a continual appraisal of existing holdings. The power of investment must be exercised so as to yield the best return by way of income and capital appreciation. It is because of this that in considering what investment to make, the trustees must put on one side their own personal interests and social, moral or political views. - 6 -
POWERS OF INVESTMENT 11. Up to 30 September 1983, the powers of local authorities in relation to the investment of superannuation fund monies were limited by the provisions of the Trustee Investments Act 1961. 12. The Local Government Superannuation (Amendment) (No 2) Regulations 1983 which were effective from 1 October 1983 modified the Trustee Investments Act and widened the investment powers quite considerably. 13. Local authority pension funds now operate in accordance with the provisions of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 as amended, which are available at www.lgpsregs.org/schemeregs/invregs2016/timeline.php#r11-7 -
RESPONSIBILITIES OF THE INVESTMENT ADVISORY PANEL 14. The Panel has overall responsibility for overseeing and monitoring the management of Pension Fund investments. 15. In this capacity, the Panel is responsible for formulating the broad future policy for investment. Not only is it necessary to ensure that monies accruing to the Fund are invested to greatest advantage, it also has responsibility for monitoring the progress of all existing investments. As with trustees, members of the Panel should not allow their own personal interests and social, moral or political views to influence their decisions. 16. At the meetings of the Panel held at intervals throughout the year, the overall investment portfolio is reviewed, and any necessary adjustments to the spread of investments are made as well as decisions about the investment of new money. 17. Prior to each meeting, the Director will arrange to supply all members of the Panel with information to enable these tasks to be undertaken. This will include a current distribution of the assets of the Fund, schedules of all investments purchased or sold since the previous Panel Meeting, views from the Fund s external investment advisors, and the most recent quarterly valuation of the portfolio. 18. Decisions will be taken on how the new money available for investment is to be allocated to the various asset classes in the portfolio, i.e. to the UK and Overseas equity and fixed interest markets and alternative investments such as property, private equity infrastructure and hedge funds. Decisions may also be made to reallocate existing investments between asset classes. However, the Panel having made that decision, will delegate the selection and timing of the individual investments to the in-house Investment Managers in the light of market conditions. 19. The Director and External Investment Advisers on the Panel will be able to guide other members of the Panel in their investment deliberation. 20. In the event of a conflict of opinions arising at Panel meetings relating to any asset allocation proposal, the proposal will be put to the vote. The voting members of the Panel comprises the ten district Councillors (two from each of the five WY District Councils), the two External Investment Advisers, the three Trade Union representatives, the two Scheme members, the Director, and one District Director of Finance. 21. The Governance and Audit Committee of Bradford Council, on advice from the Director shall have the right, in accordance with the various statutes, to overrule any decision taken by the Panel if, in its opinion, the decision is not in the best interests of the Pension Fund. - 8 -
ACTIVITY BETWEEN MEETINGS 22. Investment is a continuous process and, therefore, between meetings of the Panel provision must be made for the continual appraisal of the investment portfolio and for action to be taken as appropriate. 23. The day-to-day administration of investments is carried out by the Director through the Investment Section. Relevant adjustments to the portfolio are made in the light of the current economic and market conditions. All transactions undertaken are reported to the next meeting of the Panel. 24. The transactions completed will take account of: 24.1 the policy set at the latest meeting, 24.2 sharp or significant movements in stock market; 24.3 news and share price movements relating to individual companies; 24.4 takeovers and mergers; 24.5 new issues; 24.6 rights issues; 24.7 underwriting. 25. Sometimes, it is of the utmost importance that the transactions can be completed as a matter of urgency or the opportunity will be lost. On occasions, the time for decision is restricted to a matter of minutes. 26. For companies in which it is a shareholder, the Fund will vote on resolutions at extraordinary or annual general meetings of the companies by using either of proxy or sending a representative to the meetings. The Fund currently votes its shares at all FTSE Company AGM s and EGM s in which it has a shareholding, and similarly in the largest Continental European, USA and Japanese companies. - 9 -
RESPONSIBILITIES OF THE IN-HOUSE INVESTMENT SECTION OF THE CITY OF BRADFORD METROPOLITAN DISTRICT COUNCIL 27. The responsibilities of the Investment Section, which is responsible to the Director are summarised as follows: 27.1 provision of advice and recommendations to Panel meetings; 27.2 putting into effect the decisions taken at Panel meetings; 27.3 determining the prices at which all transactions are dealt; 27.4 determining the action to be taken on all transactions arising between Panel meetings, after consultation in appropriate cases with the External Investments Advisers; 27.5 arranging for the purchase or sale of all foreign currency arising from overseas transactions (including the negotiation of exchange rates to be applied); 27.6 perusal of all research material received from various sources, including the Bloomberg system, with the resultant translation into investment action if appropriate; 27.7 daily servicing of the Fund s bank account including arranging all short term investments in the money market; 27.8 day-to-day management of the Fund (e.g. accounting for dividends, tax reclaims, certificates, stock lending, production of portfolio valuations etc); 27.9 selecting for investment the individual securities in relation to fixed interest stocks, investment trusts, property unit trusts, UK stock market and the various overseas markets, within the broad strategy agreed upon by the Panel; 27.10 preparation of the reports that will form the basis of the discussions at meetings of the Panel. - 10 -
APPROACH TO INVESTMENT Investment Strategy 28. The West Yorkshire Pension Fund operates its own bank account. Surplus cash is invested temporarily on the money market so as to secure the best return. 29. As market values of the investments held are continually changing, a rigid policy setting out the percentage of the Fund to be invested in each asset class is not practical. A fund-specific benchmark is set, with control ranges around the benchmark for each asset class. At each Panel meeting, a decision will be taken on how money available for investment will be allocated across the asset classes, after taking into account the current position against the fund-specific benchmark and economic and market conditions prevailing at the time. It may also be necessary to move assets between asset classes in order to achieve the desired asset allocation. Spread of Investments 30. Regardless of the proportion of the Fund allocated to each asset class i.e. fixed interest, UK and overseas equities or property, there is a need to diversify investment within the asset class. In the fixed interest market the need is for a spread of repayment dates (duration) as well as counterparties. In the equity markets a need to diversify into different sectors or industries, and further into different companies within these sectors. The balance of the UK equity portfolio can be measured by using the Financial Times Stock Exchange All Share Index as a guide. See the Investment Strategy Statement for further information on diversification and risk. 31. The attributes of each asset class is outlined below: 31.1 Fixed Interest This sector provides the stability of the investment portfolio. Investment in dated gilt-edged stocks allows for repayment of the capital sum in full at some specified future date and for a fixed amount of income until the date of repayment. Indexlinked stocks provide a hedge against rising inflation, with a rising income stream and capital repayment. Market values rise and fall over time until the repayment date. - 11 -
31.2 Equities Over the longer term, investment in equities should also provide the hedge against inflation which is necessary if the assets of the Fund are to keep in line with the increasing liabilities of the Fund. Due to the element of risk involved in investing in public companies, it is essential that an effective system is adopted for spreading investment across various sectors and companies to minimise the consequences arising from the failure of an individual company, or the disappointing performance of a particular sector. No maximum target should be set for the number of equity holdings. However, in view of the size of the Fund, the minimum number should not be less than 200 in the case of the UK and for overseas equity holdings, not less than 250. With certain exceptions, because of the size of some organisations, no more than 5% of the total equity allocation should be held in one company. The percentage of an individual company s share capital held by the Fund should normally be restricted to around 5%. 31.3 Property The Fund s interest in property is both direct and through the acquisition of shares in Property Companies or Property Funds (both UK and overseas). As with equities and index-linked fixed interest stocks, investment in the property market provides some protection against inflation. - 12 -
31.4 Unquoted Investments Private Equity Funds provide an opportunity to invest in unquoted companies. Whilst offering the opportunity for exceptional rates of return, this form of investment is more risky than other forms of investment, and is not liquid. 31.5 Hedge Funds Investment in hedge funds allows access to a range of investment strategies, which are designed to deliver absolute returns to investors irrespective of stock market conditions. Investing in fund of hedge funds may provide added diversification and should reduce the risk and volatility of the overall investment portfolio. Special Considerations 32.1 Timing of Investment It is impossible to achieve the ideal of investing at the bottom of a market fall and selling at the market peak. Therefore, in the long term, investment at regular intervals should provide a steady increase in capital values assuming that over a long period continuing general trend of the equity market is in an upward direction However, although investments are made regularly, the need to switch between sectors and companies should be kept under review as the prospects of particular sectors etc change. Investment decisions should be based on the merits of each case at the time. All deals are concluded by the Investment Section using various stockbrokers. The prices of securities fluctuate rapidly and even when an individual stock or share has been selected for purchase or sale, it is preferable to allow some flexibility of timing in carrying out orders. In the final analysis, however, the Investment Section agrees on the price at which each and every security is dealt. If brokers are unable to complete transactions agreed upon at a price deemed reasonable by the Investment Section, then the transaction will not be undertaken. 32.2 Selling At A Loss The historical cost of any holding is immaterial. When deciding on whether or not a security should be sold, the original cost should not influence the decision in any way. Of more relevance is whether the money locked up in the security can be put to better use elsewhere. If a particular decision has proved disappointing, then continuing to hold the security in question may merely compound the problem. Although past performance is one aspect to be taken into consideration when assessing an - 13 -
equity holding, future prospects are of greater importance. 32.3 Rights Issues Companies wishing to raise additional capital for expansion or diversification will bring a rights issues to the market whereby existing shareholders are offered new shares pro-rata to their existing holding. The price of the new shares are normally issued at a price which is at a discount to the prevailing market price. Because of the larger number of holdings in the Fund s portfolio, it is inevitable that a number of rights issues involve companies in which the Fund holds shares. 32.4 Underwriting Arrangements will be made for the Fund to underwrite suitable new and additional issues of stocks and shares. Commission is payable to the Fund in respect of all issues underwritten and where these are fully subscribed, this will be clear profit. Where issues are undersubscribed, the Fund will be required to take up a share of the amount not subscribed, and will then have to decide whether to sell the securities or hold on to them. If the decision is to sell, then any loss on the sale would be offset by the commission received. The Fund would not normally underwrite an issue where it did not intend to hold the underwritten security. West Yorkshire Pension Fund City of Bradford Metropolitan District Council - 14 -