Meeting: Pension Fund Committee (County Hall, Durham - Committee Room 2 - 28/07/2008 10:00:00 AM)
Item: A5 Introduction to Managers and Mandates
Investment Manager | % | Asset Classes | Investment Style |
Edinburgh Partners | 28 | Global Equities | Active |
BlackRock | 20 | UK Equities | Active |
AllianceBernstein | 16 | Global Bonds | Active |
RLAM | 20 | Investment grade sterling bonds | Active |
CBRE | 8 | Global Property | Active |
Barings | 8 | Dynamic Asset Allocation - All major asset classes with derivative overlay | Active |
Contact: Hilary Appleton Ext: 3544 |
Statement of Investment Principles
Table of Contents
1. Introduction 3
2. Investment Responsibilities 4
3. Authorised Investments 8
4. Allocation Strategy 11
5. Stock Selection 12
6. Investments Requiring Prior Approval 12
7. Socially Responsible Investing 12
8. Corporate Governance 13
9. Fee Structure 13
10. Reporting Requirements 14
Appendix A - Principles 16
Appendix B - Investment Managers 18
1.
Introduction
Durham County Council is the administering authority (the “Authority”) for the Durham County Council Pension Fund (the “Pension Fund”) and the purpose of this document is to outline the broad investment principles governing the investment policy of the Pension Fund, thereby satisfying the requirements of the Regulations.
Investment Responsibilities
The Pension Fund Committee has full delegated authority to make investment decisions.
2.6 The County Treasurer is responsible for:
· Ensuring compliance with this document and bringing breaches thereof to the attention of the Pension Fund Committee;
· Ensuring that this document is regularly reviewed and updated in accordance with the Regulations;
· Exercising delegated powers granted by the County Council to:
o Administer the financial affairs in relation to the County Council’s functions as a pension fund administering authority;
o Exercise those discretions under the Local Government Pension Scheme Regulations 1997 as appear from time to time in Pension Fund Statements of Policy; and
o Authorise, in cases of urgency, the taking of any action by an investment manager of the Pension Fund which is necessary to protect the interests of the Pension Fund.
· Managing the cash balances of the Pension Fund which the Investment Managers have not invested.
3.
Authorised Investments
The limits on the amount of money that can be invested in each individual type of investment are specified in schedule 1 of the Regulations. We do not participate in stock lending or underwriting.
The Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2003 amended the regulations so as to give Authorities the option to increase some of the limits on certain types of investments provided that the Authority complies with the requirements of the Regulations. These requirements include taking proper advice, the suitability of particular investments and types of investments, the limit on the amount of such investment, the reason for such investment and the period for which the increase in the limit of the type of investment will apply. Any increase in the limit must be kept under review.
Investment Managers are instructed to comply with the regulations in respect of the relevant portfolio subject to any specific instructions. The Authority is responsible for oversight of how compliance affects the compliance of the Pension Fund as a whole.
Dividing the management of the assets between six investment managers, further controls risk. Asset allocation benchmarks have been set and performance is monitored relative to the benchmarks. This is to ensure the investment manager does not deviate from the Pension Fund Committee’s investment strategy.
The setting of specific control ranges and other investment guidelines within which the investment managers must operate also controls risk.
In-House Management
i. Midland Enterprise Fund for the North East Exempt Unit Trust
· Small, private and growing companies in the North East of England:
· £200,000 invested.
ii. Capital North East
· Start up and development capital for businesses in the North East:
· £400,000 invested, up to £500,000 may be invested.
External Investment Management
Allocation Strategy
Asset Class | Permitted Assets | Benchmark & Performance Target | Proportion of Total Fund * |
Conventional Bonds | Investment grade sterling bonds | FTSE Over 5 Year Index-Linked Gilt Index +0.5% | 20% |
Broad Bonds | Global bonds | UK 3-month LIBOR +3.0% | 16% |
UK Equity | UK equities | FTSE All Share Index +3.0% | 20% |
Global Equities | Global Equities | MSCI AC World Index +3.0% | 28% |
Dynamic Asset Allocation | All major asset classes with derivative overlay | UK 3-month LIBOR +4.0% | 8% |
Global Property | Global property | UK Retail Price Inflation +5.0% | 8% |
More detailed definitions of the mandates are given at Appendix B.
The Pension Fund Committee and the County Treasurer, in conjunction with the Independent Advisers, will formally monitor the actual asset allocation of the Pension Fund on a quarterly basis.
Stock Selection
Independent Advisers’ fees are based on a retainer for attendance at Pension Fund Committee and Annual Meetings and the provision of advice to the Pension Fund Committee. Fees for any additional work are based on a daily or hourly rate, as provided for by agreement or by separate arrangement.
Any additional work will be subject to a suitable fee arrangement or subject to separate tendering exercises.
Reporting Requirements
This appendix sets out the extent to which Durham County Council as the Administering Authority of the Durham County Council Pension Fund complies with the ten principles of investment practice set out in the document published in April 2002 by CIPFA, the Chartered Institute of Public Finance and Accountancy, and called "CIPFA Pensions Panel Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom” (Guidance note issue No. 5).
The Pension Fund Commitee has appointed six Investment Managers: Edinburgh Partners Limited (‘Edinburgh Partners’), BlackRock Investment Management (UK) Limited ('BlackRock'), AllianceBernstein Limited ('AllianceBernstein'), Royal London Asset Management ('RLAM'), CB Richard Ellis Collective Investors Limited (‘CBRE’) and Baring Asset Management Limited ('Barings') to manage the assets of the Pension Fund.
The long-term strategic allocation is as follows (the actual allocation may vary due to market movements):
Investment Manager | % | Asset Classes | Investment Style |
Edinburgh Partners | 28 | Global Equities | Active |
BlackRock | 20 | UK Equities | Active |
AllianceBernstein | 16 | Global Bonds | Active |
RLAM | 20 | Investment grade sterling bonds | Active |
CBRE | 8 | Global Property | Active |
Barings | 8 | Dynamic Asset Allocation - All major asset classes with derivative overlay | Active |
The investment restrictions detailed in this Appendix form part of the contractual agreement with Investment Managers and will only be varied after consultation with the Investment Managers in accordance with their contracts.
The Investment Manager may hold cash up to the value of 5% of the market value of the portfolio in respect of which the Investment Manager has been appointed, subject to agreements with individual Investment Managers, who may require a different limit to invest their part of the Pension Scheme’s assets. Cash in excess of this value should be returned to Durham County Council as Administering Authority.
The mandates for each Investment Manager, subject to the overall requirements of the Regulations and this Statement of Investment Principles, are as follows:
Edinburgh Partners
The Pension Fund Committee has appointed Edinburgh Partners to manage a portfolio to be invested in Global Equities.
The Investment Manager’s objective is to outperform the benchmark by 3% per annum net of fees over 3 year rolling basis.
The benchmark allocation is as follows:
Asset Class | Benchmark |
Global Equities | MSCI AC World Index |
Portfolio | % |
EP Global Equity | 100 |
Sector | Range |
Number of Stocks | Typically holding 30 to 50 stocks |
Maximum holding in one stock | 5% of the portfolio’s value at time of investment. With market movement max. 7.5% before reduction in holding |
Holding in cash | Typically not expected to exceed 5% of the portfolio’s value following the initial investment process |
Maximum holding in one sector | Diversified (e.g. Financials/Industrials) 40% Partially Diversified (e.g. Consumer Goods) 30% Homogeneous (e.g. Oil) 20% |
Maximum holding in any one country | US, Japan, UK max 50% each Other developed markets max 20% each Emerging Market Country (as defined by MSCI Emerging Markets Index) max 10% each |
There are limits on the holding of the following asset classes:
Collective Investment Schemes (CIS) | 10% of the Portfolio or as otherwise advised in writing from time to time |
CIS | No CIS sponsored by AllianceBernstein may be held |
FM Funds (a sub-class of CIS) | 10% of the portfolio or as otherwise advised from time to time |
CIS of any one body (a sub-class of CIS) | 10% of the Portfolio or as otherwise advised from time to time |
BlackRock
The Investment Manager’s objective is to outperform the benchmark by 3% per annum net of fees over a rolling three year basis.
The benchmark allocation is as follows:
Asset Class | Benchmark |
UK Equity | FTSE All-Share Index |
Portfolio | % |
UK Focus approach | 100 |
While the BlackRock UK Focus Fund is unconstrained there are some guidelines within the investment process in respect of the portfolio. These guidelines are set out below:
Sector | Range |
No. of stocks | Typically holding 15 to 30 stocks |
Maximum holding in one stock | 15% of the portfolio’s value |
Maximum holding in one sector | No maximum limit |
Holding in cash | Typically not expected to exceed 2% to 5% of the fund value |
Active risk | Expect the ex-ante tracking error (active risk) to fall within the range 5% pa to 11% pa. |
Asset Class | Maximum Holding |
Collective Investment Schemes (CIS) | 0% to10% of the Portfolio or as otherwise advised in writing from time to time |
AllianceBernstein
The Pension Fund Committee has appointed AllianceBernstein to manage a portfolio to be invested in Global Bonds.
The Investment Manager’s objective is to outperform the benchmark by 3% per annum net of fees over a rolling three year basis, with 5 - 10% volatility.
The benchmark allocation is as follows:
Asset Class | Benchmark |
Broad Bonds | UK 3-month LIBOR |
Portfolio | % |
Diversified Yield Plus Fund | 100 |
The limitations that apply to the investments are detailed below:
Sector | Range |
High Yield | 0% to 30% |
Bank Loans | 0% to 25% |
Emerging Markets | 0% to 20% |
Foreign Exchange | 0% to 30% gross,0% to 15% net |
Sovereign | 0% to 100% |
MBS | 0% to 40% |
CMBS/ABS | 0% to 30% |
Investment-Grade Corporates | 0% to 75% |
RLAM
The Pension Fund Committee has appointed RLAM to manage a portfolio to be invested in Investment Grade Bonds.
The Investment Manager’s objective is to outperform the benchmark by 0.5% per annum net of fees over a rolling three year basis.
The benchmark allocation is as follows:
Asset Class | Benchmark |
Conventional Bonds | FTSE Over 5 Year Index-Linked Gilt Index |
Portfolio | % |
Segregated - mainly index-linked securities with a specified range of +/- 2 years duration of the benchmark | 100 |
Bond classification | Range |
UK Government Index Linked Bonds | 50% to 100% |
Overseas Government Index-Linked Bonds* | 0% to 20% |
UK Non-Government Index Linked Bonds | 0% to 20% |
UK Conventional Government Bonds | 0% to 20% |
UK Investment Grade Corporate Bonds (or equivalent) | 0% to 20% |
Overseas Conventional Bonds** | 0% to 10% |
Derivatives*** | 0% |
Cash or cash equivalents (less than 1 year maturity) | 0% to 10% |
Asset Class | Maximum Holding |
Collective Investment Schemes (CIS) | 0% of the Portfolio or as otherwise advised in writing from time to time |
Any single security excluding government bonds | Maximum of 5% of portfolio |
CBRE
The Pension Fund Committee has appointed CBRE to manage a portfolio to be indirectly invested in Property. Investment will not be restricted to UK vehicles, but can be invested on at least a pan-European basis.
The Investment Manager’s objective is to outperform the benchmark by 5% per annum net of fees to be achieved over a five year time horizon.
The benchmark allocation is as follows:
Asset Class | Benchmark |
Global Property | UK Retail Price Inflation |
CBRE intend to invest in the following to achieve their objective:
Portfolio | % |
CB Richard Ellis RPI +5% | 100 |
There are limitations that apply with the construction of the CBRE portfolio. They are as follows:
Restrictions | Range |
Collective Investment Schemes (CIS) | 0% to 50% until notified in writing and thereafter 0% to 100% |
Maximum allocation to any single fund | 0% to 15% |
Maximum allocation to listed investments | 0% to 30% |
Maximum allocation to any single country (including the UK) | 0% to 25% |
Maximum regional allocations - | |
Asia Pacific Region | 0% to 40% |
North American Region | 0% to 40% |
Other Regions (excluding Europe) | 0% to 10% |
In the case of Collective Investment Schemes (CIS) taken on at the Effective Date, the requirement shall be that the Investment Manager liquidate these assets at a time that is appropriate in the reasonable opinion of the Investment Manager. There is no long stop date on this process.
The Investment Manager’s objective is to outperform the benchmark by 4% per annum net of fees over a rolling three year basis, with 5 - 10% volatility.
The benchmark allocation is as follows:
Asset Class | Benchmark |
DAA | UK 3-month LIBOR |
Portfolio | % |
Extended Risk Solutions | 100 |
The expected volatility arising from the asset distribution over the medium term is 7% to 11% per annum as represented by standard deviations of monthly returns annualised. Value at Risk (VaR) limit of 5% per 10 days with a 99% confidence level based on three years of data.
The limitations to the extent of the investments in each classification are detailed overleaf:
Asset Class | Range |
Equities (segregated and/ or pooled)* and depositary receipts, warrants and P-Notes | 0% to 65% |
Commodities* in the form of ETFs, CIS’ and Index Futures. | 0% to 30% |
Bonds | 0% to 80% |
Investment-Grade Corporate Bonds | 0% to 50% |
High Yield Debt** being all corporate and government sub-investment grade debt securities. | 0% to 15% |
Emerging Market Debt** being all government debt securities issued by countries falling within the World Bank definition of a developing market country (or similar) at the time of acquisition. | 0% to 15% |
Property in the form of REITs and CIS’ | 0% to 30% |
Hedge Funds/Structured Products/Private Equity | 0% to 50% |
Foreign Exchange including Forwards | 0% to 40% |
Cash/Near Cash | 0% to 25% |
Asset Class | Maximum Holding |
Collective Investment Schemes (CIS) | 50% of the Portfolio or as otherwise advised in writing from time to time |
CIS | No CIS sponsored by AllianceBernstein, titled Diversified Yield Bond Plus Fund, may be held. |
FM Funds (a subclass of CIS) | 50% of the Portfolio or as otherwise advised in writing from time to time. |
CIS of any one body (a subclass of CIS) | 50% of the Portfolio or as otherwise advised in writing from time to time. |
The Pension Fund Committee will allow the Investment Manager to exercise Long/Short strategies; however there will be no net short positions permissable in any asset class.
Attachments