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Investment  >  Advisory Committee  >  Meeting Summaries  >  Meeting Summary for 14 March 2005

Meeting Summary for 14 March 2005

Attended - Mike Yardley, Brian Duffin, Ewan Smith, Andy Carter, Andrew Barrie 

In Attendance: Graham Dow, Robert Talbut

The meeting of the Royal London Investment Advisory Committee covering the 4th quarter results, was finalised on Monday, 14 March 2005.

A report was received from Barrie & Hibbert covering the following items:

• Confirmation that the key parameter values underlying the financial modelling have not materially changed and therefore no changes are required to the 9 Managed Strategies and the associated risk budgets.
  
  
• The financial modelling work was extended from 1,000 to 10,000 simulations and this has removed some of the sampling error apparent in the original work. 
  
  
• As agreed at the meeting held on 10th September, the results of the sensitivity testing carried out have been documented and will be included within the final Methodology document. The results demonstrate that the recommended benchmark distributions are robust to small changes in equity and property risk premia and volatility assumptions.
  
  
• Previous concerns had been raised around the recommended property weighting which, for the Managed Pension fund, was significantly higher than is generally held by such funds. An analysis was presented varying the equity property mix for a number of points on the Efficient Frontier. This demonstrates that further increases in the property weighting would quickly move the distribution away from the Efficient Frontier whilst increases in the equity weighting do increase the expected return by only by adding further risk. This analysis supports the existing recommended benchmarks.

A report was received from Royal London Asset Management (RLAM) in respect of the 3 months to 31 December 2004 and the following items were discussed:

• The format and information contained in the report were finalised and the report should be available to the committee to a tighter deadline following the end of each quarter.
  
  
• The first section of the report details the transactions that have taken place within each of the 3 managed funds as part of the initial re-alignment of the portfolios following the establishment of the new benchmarks in September 2004.
  
  Andy Carter reported the Global Managed Pension fund had achieved the desired equity position and that activity was ongoing to purchase further property assets to increase the funds exposure.
  
  It was noted that the benchmark distribution for overseas equities had been determined on a GDP basis excluding Chine and India. The distribution is split as follows:
                        

  North America	44.8%
  Europe (ex UK)	30.9%
  Japan	13.6%
  Far East (ex Japan)	10.7%
  	100.0%

  
  A query was raised in respect of the corporate bond assets held in the Managed Pension fund, where there was a degree of duration risk being taken. Robert Talbut was asked to ensure the risk was being allowed for in the risk budget calculation.
  
  
• The second section of the report (available soon) covers the performance of the funds over the period split between:
  • The actual and benchmark performance of the building block funds
  • The benchmark performance of the 9 Managed Strategies
  • The actual performance of the 3 Managed funds.
    
    
• It was questioned whether the benchmark performance should be adjusted to allow for a 1% annual management charge when considering performance on a 'net' basis (i.e. the actual movement in the bid price of the fund over the period which is calculated after allowance for the 1% annual management charge). This was dismissed as contrary to regulations, however, future performance figures will be reported on a "gross" basis to allow a fairer comparison between the fund and the benchmark.
  
  
• The third section of the report covers details how the risk budget was used over the period, in respect of the 3 Managed funds and an attribution analysis of performance relative to the benchmark.

It was noted that, with the exception of property position, little risk has been taken relative to the benchmarks.

• The final section of the report covers how RLAM intend to use the risk budget over the next Quarter (Q1 2005). RLAM are optimistic on equity and property markets and this is likely to be reflected in increasing use of the risk budgets available. However, relative valuations between the different asset classes are not extreme and hence it is likely that use of the risk budgets will remain cautious.