MINUTES of a meeting of the INVESTMENT COMMITTEE held at County Hall, Matlock on 16 April 2007 PRESENT. Councillor G Carlile (in the Chair)

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1 MINUTES of a meeting of the INVESTMENT COMMITTEE held at County Hall, Matlock on 16 April 2007 Derbyshire County Council PRESENT Councillor G Carlile (in the Chair) Councillors Mrs M Booth, P J G Clark, E Lancashire MBE, C R Moesby, Mrs A Noskwith, and I Pryce Derbyshire LGA Councillors A Cox and A Tomlinson Derby City Council Councillors M Carr and D Roberts 1/07 MINUTES RESOLVED that the minutes of the meeting of the Committee held on 11 December 2006 be confirmed as a correct record and signed by the Chair. 2/07 BACKGROUND AND MARKET RETURNS Within the UK, the budget had been broadly neutral. Forecasts for the GDP growth remained unchanged. In February, the Consumer Price inflation had risen by 0.4%, and the Retail Price Index had risen to 4.6%. Interest rates had been increased to 5.25%, with possible further necessary increases. GDP growth in the USA had been revised downwards, and the forecast for 2007 was now 2.4%. The budget deficit for 2006 had been better than predicted, and the current account deficit was also moderated due to economic slowdown. Headline inflation measures had fallen significantly in the last quarter, but core inflation measures remained above target. GDP growth throughout Europe had strengthened during 2006, but a slowdown had been forecast for However, this had not yet materialised and 2007 consensus forecasts had been revised upwards. Concern had been raised regarding inflationary pressures, and the ECB had raised interest rates. There had been a growth in the Japanese economy during quarter 4 of During February, the Bank of Japan had raised the overnight cash rate to 0.5%, but it was unlikely to raise rates further. 1

2 The People s Bank of China had increased bank reserve requirements by a further 0.5%, and it had also raised its interest rate by 0.27%. This was against a background of GDP growth of 10.7% in 2006 and forecast growth of 9.7% in The economy in Hong Kong was expected to grow to 5.5% in 2007, and the Reserve Bank of Australia had expressed concern regarding wage growth and general inflationary pressures. The returns for the major asset classes for the year 1 April March 2007 were reported. Returns on equity markets had been mixed the UK, US, Europe and Asia Pacific had performed reasonably well, whilst Japan had been weak. Overseas investments had been adversely affected by the weakness of other currencies against the sterling. UK Gilts and Index Linked stocks had provided positive returns but had underperformed cash. 3/07 ASSET ALLOCATION, STRATEGY AND PERFORMANCE The Head of Corporate Finance reported the current asset allocation, and the proportion of the Fund held in each sector at 31 December 2006 was highlighted, and compared with the asset allocation ranges and the average local authority position at the same date. The Fund was overweight in equities, substantially underweight in conventional bonds and index-linked stocks, slightly overweight in property, and heavily weighted in cash. The local authority average was more weighted in property and overseas equities. The Fund was within its permitted range for all asset classes. Investment activity since the last meeting was reported. The Fund s investment assets were currently valued at 2,025.4m. A list of transactions since the last meeting and a copy of the latest portfolio were presented. The strategy reports of the Investment Advisers were presented, but only Mr Williams was able to attend the meeting. He gave a more cautious approach than Morley Fund Management, and stated that there were inflation fears in a number of the world s major economies. The view was to be fairly neutral in equities and underweight in bonds. The Fund s results for the first three quarters of 2006/07 were compared with index returns and the local authority average performance. Performance in quarter 3 was ahead of the Fund s benchmark index and in line with the local authority average. To date, it trailed the local authority average, but underperformance against the benchmark index had been reduced to 0.3%. The weakest performance had been in Japan. The situation was currently being reviewed, and any changes would be reported back to the Committee. 2

3 RESOLVED (1) to note the report; and (2) to approve the strategy outlined in the report. 4/07 LAPFF The minutes of the LAPFF AGM held on 29 November 2006 and the meeting held on 24 January 2007 were presented for information. RESOLVED to note the minutes of the LAPFF AGM held on 29 November 2006 and the business meeting held on 24 January /07 SOCIALLY RESPONSIBLE INVESTMENT The Committee had previously received a report on the performance of the Fund s ethical unit trusts. A further report was requested to look at all aspects of Socially Responsible Investment, and to review the performance of individual unit trusts. The types of socially responsible investment were detailed ethical/negative screening, positive/best in class screening, constructive engagement, shareholder activism, and sustainability theme investing. Socially Responsible Investment was investment which combined investors financial objectives with their commitment to social concerns. The principle of introducing environmental and social concerns into the investment process could be applied in a number of ways. When it was decided to invest in ethical trusts, a number of trusts were analysed for ethical criteria, track records, liquidity, exposure to UK smaller/growth companies, and lack of overlap with the Fund s main UK equity portfolio. The trusts chosen were the F&C Stewardship Fund and the CIS Sustainable Leaders fund. Investment had also been made in two environmental trusts Impax Environmental Trust and the Low Carbon Accelerator fund which could be considered as ethical investments. Other investments in the Fund s UK equity portfolio were considered suitable for ethical investors and featured in the FTSE4Good Index and in the Ethical Trust portfolios. A further review of ethical trusts had been undertaken, and a number of the better performing funds had been analysed. Details of these were given. In general, the Trusts had underperformed the Allshare Index. Ethical trusts had recently shown stronger performance and most had outperformed the FTSE Allshare and the FTSE Small Companies indices. Of the funds analysed, the F&C Stewardship Fund had been the strongest performer over the longer term. The CIS Sustainable Leaders Fund had been the weakest performer, but had improved more recently. It was 3

4 therefore recommended to retain the current holdings. It was also recommended that the investments in the Impax Environmental Trust and the Low Carbon Accelerator trust should be treated as being part of the Fund s ethical portfolio, and that further investments of this type should be considered as opportunities arise. RESOLVED (1) to retain the current holdings; and (2) that the investments in the Impax Environmental Trust and the Low Carbon Accelerator trust be treated as being part of the Fund s ethical portfolio and that further investments of this type be considered as opportunities arise. 6/07 CORPORATE GOVERNANCE The Fund s voting activity between 1 November 2006 and 28 February 2007 was reported. 7/07 RISK ANALYSIS FEBRUARY 2007 The results of the February 2007 risk analysis were presented to the Committee. Analysis of the risk model indicated that the UK portfolio had a relatively low tracking error and low beta, which suggested that the portfolio would generate a small outperformance when defensive stocks out-performed the market. The biggest sector risk factor was the large underweight position in the mining sector, and the largest economic risk factor was the negative connection with oil prices, and it was felt that the UK portfolio would out perform if commodity prices fell. Sector and economic exposures had remained fairly stable during the quarter, despite the recent increase in market volatility. 8/07 EXCLUSION OF THE PUBLIC RESOLVED that the public be excluded from the meeting during the Committee s consideration of the remaining items on the agenda to avoid the disclosure of the kind of exempt information detailed in the following summary of proceedings:- SUMMARY OF PROCEEDINGS CONDUCTED AFTER THE PUBLIC HAD BEEN EXCLUDED FROM THE MEETING 1. To confirm the exempt minutes of the Committee held on 11 December To consider the exempt report of the Head of Corporate Finance on:- 4

5 a) Investment Committee Business Plan 2007/08 b) Review of External Manager 3. To consider the exempt report of the Head of Corporate Finance on Review of Investment Advisers Contracts 5