Investment

Investment allocation

Change in allocation chart based on aggregated Net Asset Statements year to 31 March 2018

Investment Assets   2017 2018 Change Fixed interest securities █ 7.0% 6.7% -0.2% Equities █ 31.8% 28.5% -3.2% PIVS █ 47.3% 49.6% 2.3% Property PIVs █ 47.3% 4.9% 0.3% Derivatives █ 0.6% 0.2% -0.4% Property █ 2.7% 3.0% 0.3% Other █ 1.1% 1.6% 0.5% Private Equity █ 2.6% 2.6% 0.0% Cash deposits █ 2.2% 2.6% 0.4% Other balances █ 0.3% 0.4% 0.1% Total   100.0%  100.0%
Click on the chart for a larger view in a new tab/window

Asset allocation charts based on aggregated Net Asset Statements as at 31 March 2018

Asset class	Asset type		£000s	%	£000s	%
Bonds	Bonds	█	18,412,952	6.7%	18,412,952	6.7%
Equities	Equities	█	78,243,785	28.5%	78,243,785	28.5%
PIV	PIV	█	136,000,731	49.6%	136,000,731	49.6%
Property PIV	Property	█	13,313,286	4.9%	21,436,278	7.8%
Property direct		█	8,122,992	3.0%
Other	Other	█	4,285,505	7.3%	17,881,572	7.3%
Total					274,199,097	100.0%

Total asset allocation
	Other asset allocation

Asset class	Asset type		£000s	%
Other	Cash Deposits	█	7,183,543	35.7%
	Private equity	█	7,147,347	35.5%
	Other balances	█	1,067,604	5.3%
	Other (including aggregated private equity/infrastructure/other)	█	1,253,008	6.2%
	Infrastructure	█	3,032,497	15.1%
	Derivatives	█	421,352	2.1%
Total			17,881,572	100.0%

Net return on investment based on aggregated Fund accounts year to 31 March 2018

Net return on investment % is calculated by dividing the net return on investment by the average value of the fund over the year - this differs from calculated performance.
The average return on investment, and total for the scheme on an aggregate basis, for the year ended 31 March 2018 was 4.4% (2017 19.4%). The average investment expenses were 0.4% over the period (2017 0.4%), therefore the net return on investment was 4.0% (2017 19.1%).

The above chart shows the distribution around 4.0%, for 2018 █, with most funds falling in a range of between 15.0% and 22.0%. For 2016 █ the distribution was around 0.1%, with most funds falling in a range of between 0.3% and -0.3%.

Investment Performance

The following market commentary was provided by Pensions & Investment Research Consultants Ltd (PIRC) based on their Local Authority Pension Fund Performance Universe. Please see the LAPPA website for further details.

This year’s peer group results is based on a Universe of 61 funds with a value of £177bn. This represents some two thirds of local authority pension fund assets and includes all of the Welsh and Northern Pools, all bar two of the London Pool, with funds from all other pools except Central.

LA Market Environment

Over the last twelve months the average Local Authority pension fund has returned 4.5%. This return is below the 30 year average of 8.9% p.a. but broadly in line with actuarial assumptions which are currently estimating around 4% p.a. Asset returns were tightly grouped with bonds, equities and alternatives returning 1%, 4% and 6% respectively for the year.  Strategic asset allocation therefore had less of an impact than usual - the range of individual fund returns was about half that seen in the year previous with almost all Funds returning between 2% and 6% for the year.

UK equities underperformed all major overseas markets for Sterling investors. Active management also failed to add any value above the benchmark.

After struggling in 2016 to 2017 active global equity managers came back strongly in the last year. The average global equity portfolio outperformed the index by over 2% in the latest year. Baillie Gifford, the largest active equity manager across the LGPS, performed particularly strongly. The funds in the top decile of performance in the last year were all managed in part by Baillie Gifford.

Bond markets produced small positive returns. Those funds that invested in absolute return mandates produced better returns than those managed against market indices.  Most bonds are managed on an active basis and the move towards absolute return portfolios (all of which are actively managed) has meant that the level of passive management within this group has declined further in the last year. Bond portfolios perfromed broadly in line with benchmarks with exception of overseas bonds where they comfortably outperformed.

Property was the best performing of the major asset classes returning 10% for the year. Most funds now have some exposure to this asset which enhanced overall returns.

In terms of asset allocation, this has remained broadly unchanged over the last decade - with equities remaining the dominant asset class in most fund's allocations.  The reduction in the equity exposure was reduced at the fastest rate yet seen in the latest year. However, the LGPS is still substantially overweight in equities when compared with the corporate sector where schemes have sought to 'de-risk' their assets, moving instead to bonds and cash flow matching investments. See in Figure 1 below:

 

Figure 1: Asset Allocation 2018

 

Allocation	31/3/2016	31/3/2017	31/03/2018
Equities	60	62	55
Bonds	16	15	18
Alternatives	9	10	11
Property	9	8	9
Cash	3	2	3
Diversified Growth	3	3	4

Longer Term Performance

Performance has been extremely strong over the medium and longer term. There have been only five years of negative performance in the last thirty, at the start of the millennium (the bursting of the dot-com bubble) and the global financial crisis (2008/09). All periods were followed by double digit returns. The equity 'shocks' that investors are so concerned about mitigating have been infrequent and the reward for holding equities substantial.

Figure 2: Discrete Period Performance of Local Authority Funds

% pa	3 Years	5 Years	10 Years	20 Years	30 Years
Average	8.3	8.8	7.7	6.5	8.9
Median	7.7	8.5	7.5	6.1	8.7
RPI	2.7	2.3	2.8	2.8	3.3
CPI	1.7	1.4	2.3	2.0	2.6