Agenda item

Report of the Chief Operating Officer. The Committee requested a review of the Fund’s strategy with a focus on potential non-directional investments that will offer some protection to the Fund against downside in equities. The attached report from the Fund’s investment consultants, Mercer, outlines the ideas/strategies that could be implemented to achieve this.

The Committee and Board considered the report on the review of the Investment Strategy – Non-Directional Investment, presented by Steve Turner, Mercer. The report noted the significant positive contribution recently made to the Fund by currency, and set out options for locking in some of those gains by currency hedging, as well as wider considerations around possible changes to the investment strategy as had been covered in the training session prior to the meeting. Officers endorsed the findings of the Mercer recommendation in respect of currency hedging as a means of reducing the risk to the Fund.

In response to a question from the Committee regarding the costs associated with amending the investment strategy, it was noted that some of the recommendations for currency hedging would have a slightly higher management cost, and there was also be one-off transaction costs associated with moving funds, however the overall recommendation was that these changes would be beneficial to the Fund. Further to the report having been produced, it was reported that the option of a hedged Low Carbon Index fund was now available, and this was felt to be of interest to the Committee and Board. In response to a question from the Committee, it was confirmed that it would be an easy process to introduce currency hedging, and also to withdraw from it if economic circumstances were to change – authority could be delegated by the Committee and Board to enable the COO, in consultation with the Chair, to implement changes to the strategy within certain parameters, in order to enable the Fund to respond quickly to changing circumstances if necessary.

It was agreed that a report would be brought to the next Committee setting out detailed proposals for the introduction of currency hedging and setting out the parameters within which the COO, in consultation with the Chair of the Committee and Board, could act to change the currency hedging allocation.

The Committee and Board agreed that a report on strategy review should be presented to the next meeting, with a focus on the key issues of inflation protection against liabilities, and the reduction of the direct equity allocation, with a move to multi-asset strategies. It was noted that any changes to the investment strategy would need to be made quickly so that moves could be implemented before the change in the status of the Fund as of 31 December 2017, which would prevent the Fund from taking strategic asset allocation decisions, and it was therefore important for the Committee and Board to take any such decisions at the earliest opportunity.

In response to a question from the Committee and Board regarding the investment decision made by Islington with regards to social housing, the Chief Operating Officer agreed to meet with interested Members outside the meeting to discuss this product in further detail, and would also bring an update on this matter back to the Committee and Board.

Action: Chief Operating Officer

RESOLVED

i)             That the Committee note the content of the report and attached appendices.

ii)            That a report on strategy review be brought back to the next meeting of the Committee and Board for consideration, focussing on the key areas of inflation protection against liabilities and introducing multi-asset strategies, with an associated reduction in direct equity allocation.

iii)           That the Committee agree in principle to the introduction of a 50% currency hedge ratio, with a further report to be brought back to the next meeting of the Committee and Board setting out the final recommended allocation and parameters within which the COO would be delegated to act in consultation with the Chair of the Committee and Board to change the allocation.