Minutes:
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ATTENDANCE BY FIVE FUND MANAGERS:
Each Fund Manager gave a presentation of approximately 10 minutes followed by questions from Members and the Advisor to Trustees.
i. Bernstein ii. Wellington iii. ING iv. Capital v. Fidelity
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i. Bernstein
Patrick Rudden and George Blunden entered the proceedings and addressed the Panel on behalf of Bernstein.
They informed members that, over the 4th quarter of 2005, fund performance had been 0.43% above benchmark and 0.07% below target.
Mr. Rudden advised the Panel that the best returns in Q4 had been in the consumer staples, consumer cyclicals and construction sectors. The FTSE as a whole had increased by 22%.
The Panel were further informed that more than two-thirds of the sales of large UK companies were made overseas. The UK market was thus reflecting strong sales elsewhere as well as strong sales in the UK.
Members were informed by Mr. Rudden that the fund had made a significant investment in Vodafone. Bernstein was of the opinion that Vodafone had good earnings potential as it was the largest or second-largest player in most mobile phone markets with the exception of Japan. Vodafone had sold off its Japanese operations, which had been welcomed by most industry analysts. This would mean that Vodafone had potential for major share price growth in the near future.
The Advisor to the Trustees, Howard Jones, enquired about the split between execution and research costs in the fees Bernstein paid brokers.
Mr. Rudden responded that total commission was 15 basis points (0.15%). Of this, it was estimated 5 to 7 basis points were research costs and 8 to 10 basis points execution costs.
The Chair enquired as to whether the fund had cast any proxy votes on controversial issues in the 4th quarter. Mr. Rudden responded that most controversial issues come up for consideration at AGMs around April. As such, the fund had not cast any proxy votes on major issues in the quarter under consideration.
Mr. Rudden and Mr. Blunden then withdrew from the proceedings.
ii. Wellington
Mike Elwood and Cassie Martin entered the proceedings and addressed the Panel on behalf of Wellington.
Mr Elwood and Ms Martin reported that fund performance was 0.24% below benchmark and 0.74% below target in the quarter to December 2005. Annualised performance since inception was 1.59% below benchmark and 3.59% below target.
Mr. Elwood informed the Panel that the fund was heavy in oil stocks. The recent fall in oil prices had affected the value of oil company shares significantly. This was one of the principal reasons given for underperformance. .The fund was overweight large cap companies whilst the largest growth had occurred amongst small cap companies, this had hurt Fund performance.
Mr. Jones asked if the fund managers were able to disaggregate commissions paid to brokers. Mr. Elwood replied that Wellington was unable to do so at this time.
In order to improve performance, Mr. Elwood informed the Panel that staff would be added to the sections within Wellington that researched companies operating in the financial and consumer discretionary sectors.
Mr Elwood and Ms Martin then withdrew from the proceedings.
iii. ING
Mark Bunney and Alistair Dryer from ING entered the proceedings and addressed the Panel concerning the property investments the firm was undertaking on behalf of Haringey LGPS.
Mr. Bunney and Mr. Dryer informed the Panel that fund performance was 0.25% below benchmark and 0.43% below target in the quarter to December 2005. Annualised performance since inception was 0.34% above benchmark and 0.36% below target.
Mr. Dryer informed members that ING was not in agreement with some commentators who had said the property market was overvalued. He stated he still felt it had room for growth.
Mr. Bunney advised the Panel a large proportion of the investments were in City office space. Members were informed that rent for office space in the City was running at about £50 per square foot. This was still less than the all-time high of £70 reached at the end of the 1980s boom. The vacancy rate for office space was less than 10% and was still falling, suggesting that rent rises would continue.
Mr. Bunney and Mr. Dryer shared a copy of the newly agreed FRAG-21 certificate for ING as required.
Mr. Bunney and Mr. Dryer expressed concern about the benchmark used to evaluate performance. They suggested that the benchmark be moved from the HSBC /AREF pooled property index to the HSBC/AREF balanced funds index. The number of specialist funds in the pooled property benchmark has increased substantially since the funds inception, increasing its risk profile. The balanced fund benchmark has a lower risk profile which more closely resembles that which the council committed to at the inception of the mandate.
Mr. Bunney and Mr. Dryer then withdrew from the proceedings.
iv. Alliance Capital
Anthony Burgess entered the proceedings and addressed the Panel on behalf of Alliance Capital.
Mr. Burgess reported to members that fund performance was 1.09% above benchmark and 0.72% above target in the quarter to December 2005.Annualised performance since inception was 0.19% below benchmark and 1.69% below target.
The Panel was further informed by Mr. Burgess that the bond market was in a very unusual state at the moment. The shortage of long-term gilts that meant that the rate of return on 50-year gilts had fallen to just 0.75%. Although the LGPS’ desire for fixed and secure assets for part of its portfolio and government regulations necessitated the holding of gilts, the performance of these was currently poor.
Mr. Burgess advised the Panel that companies that Capital had invested significantly in included HBOS (Halifax Bank of Scotland Group) and AstraZeneca. Mr. Burgess further advised the panel that HBOS had simplified its product range for mortgages and so was better able to sell these to customers who were baffled by the range of mortgages on offer. Mr. Burgess commented that AstraZeneca had developed a new anti-cholesterol drug. He suggested this had the potential to make large profits for the firm.
Mr. Jones sought clarification on the disaggregation of commission. Mr. Burgess responded that commission amounted to approximately 10 basis points (0.1%). He commented that the vast majority of commission, around 95%, was paid for execution rather than research.
Mr. Burgess further advised that the fund was overweight in technology stocks. They were currently not performing well, especially Microsoft, as Microsoft had delayed the launch of its Vista operating system.
Members sought clarification on the approach Capital was taking to corporate social responsibility. Mr. Burgess responded that there was no explicit provision to select or not to select stocks on ethical grounds. However, Capital were focussing on climate change and working with companies to promote energy efficiency.
Mr. Burgess then withdrew from the proceedings.
v. Fidelity
Peter Yarrow and Simon Kyte entered the proceedings and attended the meeting on behalf of Fidelity and addressed the Panel.
The Panel was informed by Mr. Yarrow and Mr. Kyte that the fund had achieved a 5% return, 0.5% above the benchmark.
Mr. Yarrow informed the Panel that there had been strong growth in corporate profitability worldwide and that a large amount of mergers and acquisitions activity was taking place.
Mr Yarrow brought to the Panel’s attention that low bond yields were a problem facing the industry. He informed the Panel that they had fallen to an all-time low but, in his opinion, they were unlikely to fall further.
Mr. Jones sought clarification from Mr. Yarrow and Mr. Kyte about the breakdown in commission between execution and research costs. Mr. Yarrow estimated that around 70% of commission costs were execution ones.
A company restructure within Fidelity was mentioned in the report of the fund managers. Mr. Yarrow informed the Panel that changes in the way teams were structured would enable better communication between staff and hence a pooling of knowledge.
Mr. Yarrow further advised that a scheme had been established which allowed Pension Funds to benefit from the double-taxation treaty between Britain and the US. Members were advised that this was good news for the LGPS as it would improve the net returns from US investments.
Mr. Yarrow and Mr. Kyte commented to the Panel that good results had been obtained in Japan. The largest Japanese telephone company, NTT, had suffered a bad performance on the Japanese stock market. Fortunately, Fidelity had been underweight in NTT and so was not affected by its fall. The fund benefited from the rise in value amongst other big players in the Tokyo stock exchange.
Mr. Yarrow and Mr. Kyte then withdrew from the proceedings.
RESOLVED:
That the details of each of the presentations be noted.
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