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AllenbridgeEpic Investment Advisers

London Borough of Hounslow

Strategic Asset Review

AllenbridgeEpic Investment Advisers Limited is an appointed representative of Allenbridge Capital Limited which is Authorised and Regulated by the Financial Conduct Authority

7th January 2015

AllenbridgeEpic Investment Advisers Limited is a subsidiary of Allenbridge Investment Solutions LLP

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Why do you need to consider any changes?

Funding level has improved but deficit has increased slightly – still need to generate a return to fill the gap.

Actuary is assuming a discount rate of 6% per annum (down from 6.8%). The scheme needs to beat that if the deficit is to be reduced.

AV 2010 AV 2013

Fund value £509 million £684 million

Liabilities £629 million £809 million

Funding level 81% 85%

Deficit £120 million £124 million

Actuary assumed discount rate 6.8% 6.0%

Risk/return consideration

Strategy consideration

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Other considerations…

A low yield environment – review fixed income strategy?

Uncertainty in global economy – increase diversification?

Poorly performing managers – review multi asset mandates?

Market consideration

Economic consideration

Execution consideration

Remember that any changes will result in transition costs.

These costs must be compensated for by future expected performance from the new strategy.

WM analysis: more successful LGPS funds tend to have longer term fund managers,

and are typically less complex.

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Actuarial/strategy considerations

Funding level has improved but deficit has increased slightly – still need to generate a good return to reduce the deficit.

Actuary is assuming a discount rate of 6.0% per annum. The scheme now needs to beat 6.0% if the deficit is to be reduced.

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6.0%

6.5%

7.0%

7.5%

8.0%

£60.0m £65.0m £70.0m £75.0m £80.0mVolatility (£m)

Exp

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WM Analysis: your fund’s risk appetite was average, but you managed to achieve a higher return than other LGPS funds with similar level of risk

Issue 1: do you wish to change your risk appetite?

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Fixed income considerations

Medium term decision in December 2012 to switch the strategic allocation in bonds from government bonds to corporate bonds.

This added an estimated 5% to the fixed income portfolio return to the end of September. But the spread has narrowed since 2012. Interest rates may also rise over the next two years.

In addition, bond managers’ performance has been mediocre relative to Index.

Aberdeen’s pooled funds have fallen in size and this presents a challenge.

Issue 3: do you wish to change bond managers?

Issue 2: do you wish to change the strategic bond benchmark?

Start of new strategy

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Diversifying considerations

The fund still has an allocation of 69% to UK and overseas equities. The average LGPS allocation is 63% according to WM.

Global economic uncertainty lies ahead. Quantitative easing vs. tapering; inflation vs. deflation, developed economies vs. developing vs. frontier economies, geo-political risks.

In addition, equity managers’ performance has recently been poor relative to Index.

Yet the diversifying portfolio is doing well relative to multi-asset managers (so far).

Issue 5: if yes, which diversifying assets? More to DGFs or separate allocations?

Issue 4: do you wish to allocate more to diversifying assets (NB need to achieve 6%)

Source: Aberdeen, BlackRock, figures to end September 2014

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Diversifying assets - hedge funds?

What are they? Funds that allow leverage, often use derivatives, and are often unconstrained in

terms of what they can invest in. Range of different strategies with different risk/return profiles.

Why consider them? If run properly, they can diversify risk effectively and protect against market

falls. A steady total fund return is better than a volatile return stream.

Why avoid them? They can be complex strategies with low transparency. Poor media coverage.

May be constrained by illiquidity – entry and exit limitations. Fees are generally high.

Do you have them already? Yes, via Aberdeen’s DGF. At end September 3.5% of their DGF was in

hedge funds (0.04% of total fund).

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Diversifying assets - infrastructure?

What is it? Investment in essential public services such as transportation, energy,

communication, utilities and social services (e.g. hospitals). Best accessed via pooled funds. Can

be either debt (low risk) or equity (higher risk).

Why consider it? Can deliver good returns (equity) or secure income streams (debt). Low

correlation with conventional asset classes. A hedge against inflation risk. Government

encouragement to invest.

Why avoid it? May be constrained by illiquidity – entry and exit limitations. Limited number of

fund managers offering access to this market. Fees are high. Particularly exposed to risk of

legislative changes, political risks and environmental issues.

Do you have it already? Yes, via Aberdeen’s DGF. At end September 9.3% of their DGF was in

infrastructure (0.11% of total fund).

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Diversifying assets - commodities?

What is it? Investments in raw products such as livestock, energy, precious metals, food etc.

usually accessed via Pooled Funds that invest in the traded futures market.

Why consider it? Low correlation with conventional asset classes. Good hedge against the risk of

inflation. They can provide healthy investment returns.

Why avoid it? Affected by supply and demand (e.g. oil). Complexity and use of futures market

means access will be via a pooled fund. Can be extremely volatile. Some commodities are low

yield investments.

Do you have it already? Yes, via Aberdeen’s DGF. At end September 4.3% of their DGF was in gold

bullion (0.05% of total fund).

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High yield bonds/emerging/frontier market debt?

What are they? A higher paying bond issued by a company with a lower credit rating than BBB.

Why consider them? Offers a premium yield to compensate for lower credit rating. Reduces

impact of negative UK equity returns on portfolio’s performance.

Why avoid it? Higher volatility than UK gilts. Default risk a major consideration. Liquidity

constraints.

Do you have it already? Yes, via Aberdeen’s DGF. At end September 10.2% of their DGF was in

high yield/frontier market bonds (0.12% of total fund). Yes, via BlackRock’s ALMA. At end

September 19.8% of their ALMA was in high yield/emerging market debt (0.57% of total fund).

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Outcome: may mean the Scheme needs to consider higher income strategies in future.

Summary of issues for further consideration

Outcome: fine-tunes the diversifying strategy for the pension fund.

Issue 6: will the scheme need to drawdown income to meet future cash-flow?

Issue 1: do you wish to change the level of risk/expected return?

Outcome: determines the overall risk appetite (and strategy) for the pension fund.

Issue 3: do you wish to change bond managers?

Issue 2: do you wish to change the strategic bond benchmark?

Outcome: captures the best investment opportunity in the current economic climate.

Outcome: allows the scheme to access a “best in class” manager.

Issue 5: if yes, which diversifying assets? More to DGFs or separate allocations?

Issue 4: do you wish to allocate more to diversifying assets?

Outcome: reduces equity risk in the portfolio during periods of economic uncertainty.

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Important information

This document is directed only at the person(s) identified on the first slide on the basis that they are a professional investor or professional customer. It is issued by AllenbridgeEpic Investment Advisers Limited, an appointed representative of Allenbridge Capital Limited which is Authorised and Regulated by the Financial Conduct Authority. No liability is admitted to any other user of this report and if you are not the named recipient you should not seek to rely upon it. Information about securities contained in this report is provided for information purposes only. Nothing contained herein should be construed as a recommendation or solicitation to buy or sell any security.