Pension fund and oil reserves bounce back after bleak two years on the markets

The combined market value of Shetland Islands Council’s pension fund and oil reserves grew by well over £100 million in the last financial year, providing a welcome boost to public funds ahead of impending government cutbacks.

It follows the news earlier this month that Shetland Charitable Trust had pocketed £50 million from its stock market investments and, on the back of the UK’s tentative financial recovery, leaves the isles’ community funds in a considerably healthier position than at this time last year.

During a series of lengthy presentations today from the six fund managers responsible for investing the SIC’s various portfolios, councillors were told that the good news was largely a consequence of the economic recovery. Stock markets have recouped much of the fall in value caused by the financial and banking crises between 2007 and 2009.

The pension fund grew from £147 million at the end of March last year to £222 million at the close of the 2009/10 financial year, close to its peak value of £225 million back in 2007. Stock market turmoil in recent weeks, partly a result of the crisis afflicting the Euro zone, which does not seem to have been alleviated by a multi-billion Euro bailout package, means the fund had slipped back to £216 million by 14th May.

The oil reserves, invested in an approximate 50-50 split between bonds and equity markets, also recovered very well. Having stood at £216 million in March 2009, the reserves grew by £50 million over the course of 2009/10. The council has spent £35 million of that on its capital programme and on supporting its annual revenue spend. That left the reserves with a market value of £231 million by the year end. They have fallen back by around £3 million in the past six weeks.

Stock market performance analyst for the SIC, Karen Thrumble of WM Company, said that in general terms it was “much, much better news than last year”, adding: “We really saw the markets bounce back.”

SIC convener Sandy Cluness noted that the global economy has been going through an “amazing” and unprecedented few years and the up-and-down performance of the council’s investments largely reflected that.

During a three-and-a-half hour meeting in Lerwick Town Hall, members were given their annual précis of stock market fortunes over the past 12 months. As well as 20-minute presentations from each of the six fund managers, they were provided with a seemingly endless array of different numerical permutations contained in graphs of all shapes and sizes.

Each of the funds is invested by a trio of different managers, with Black Rock – formerly Barclays Global Investors – responsible for investing 92 per cent of the pension fund in equity markets and bonds. Black Rock took over the mandate from Capital International in October 2008 and Ms Thrumble said the approach had been a satisfactory one to date, in line with the benchmark for the sector.

Black Rock attempts to track and match the performance of the market and the council’s decision to employ its services had inherent advantages, Ms Thrumble said, because its less risky investment strategy saved the council around £1 million in fees each year. It charges 0.1 per cent of the value of the funds, whereas more active managers would charge 0.6 per cent or more. Black Rock took advantage of the recovery to improve its portfolio’s value from £136 million to £204 million.

Much less satisfactory was the continual dismal performance of Record’s pension fund investments on the riskier currency market. Its value remains at around £2 million, some way down from the £5 million the SIC had entrusted Record with back in 2007.

Members made their disquiet known, with Mr Cluness expressing frustration on more than one occasion during a presentation which he evidently felt did not sufficiently address Record’s poor management of community money. Laura Baisley, meanwhile, said the money “would have been safer in a chest under my bed”.

Asked whether and when the council might get some of the losses back, Record director James Wood-Collins said low interest rates in economies like the UK had not helped the portfolio’s performance and it was seeking out safer currencies like the Japanese Yen and the Swiss franc.

Mr Wood-Collins said interest rates were now starting to rise in Australia and Norway and that Record “needs bigger currencies to start doing the same”. “We don’t believe that it will be too long,” he said. “But we can’t give you any precise dates.”

Following changes in legislation, members are to receive proposals for a new investment strategy in late June and they may yet choose to follow their own lead, as trustees of Shetland Charitable Trust, in ditching Record. Particularly if councillor Caroline Miller’s anger is anything to go by: “I am really dissatisfied by Record. They haven’t told us when they’re going to recuperate the losses [and] I think that’s the worst presentation I’ve ever heard.”

The third company responsible for a portion of the pension fund, Schroders, is responsible for £20 million which it was given to invest in the property markets. Remaining cautious about the state of the property market, it has retained £3.6 million of the funds as it continues to look for suitable investment avenues.

Schroders’ investments are a “very long-term” game and, though the company performed 12.6 per cent below the benchmark for the sector, councillors chose not to register “dissatisfaction” with its performance at the behest of councillor Bill Manson, who argued it had been sensible in approaching the volatile property market in a cautious manner.

The council’s oil reserves, meanwhile, are spread between four different pots. Baillie Gifford manages a £38 million portfolio of bonds and also holds £72 million of investments on equity markets. Its capital fund performed marginally above the benchmark in what it described as a “fairly flat” bonds market, while it was just below the benchmark in the equity markets.

Baillie Gifford explained it would have performed better in the past year had it held more of a stake in banks, whose stocks rose as they began to put the worst of the banking crisis behind them. But the company remains sceptical about getting involved in Western banks, preferring to focus instead on banking organisations “which are doing proper banking” (i.e. taking in deposits and dishing out loans and mortgages). It is investing in banks in Brazil, China, Hong Kong and Turkey at present.

Insight’s £39 million portfolio of bonds outperformed its benchmark target in what it described as a fairly stable environment. Despite concern over the level of the UK government’s £800 billion+ debt, Insight said the cost of buying insurance on UK debt was “as flat as a pancake” and there would be “no walking away” from government debt, which made it a “safe haven” for investors.

The £82 million equity portfolio held by GMO, meanwhile, slipped to five per cent below the benchmark – although the actual value of the fund increased by nearly 43 per cent. GMO’s representative, Simon Harris, said he was confident that things would improve in the year ahead, but councillors noted its performance with dissatisfaction in the meantime.