20th May 2018
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Gray: big savings if SIC ditches fund manager and changes investment policy

James Gray

SIC finance boss James Gray.

The SIC can save £300,000-a-year by changing the way its oil reserves are invested on UK and world money markets, according to its finance chief.

In a report entitled “Securing the Best for Shetland”, James Gray proposes a new strategy from 2013-2018 which would lower the fees paid to investment managers by more than double the £150,000-a-year sum councillors had hoped to save.

That would be done primarily by ditching fund manager GMO, which has been responsible for investing around a third of the reserves since 2008, and introducing greater “passive” rather than “active” management of funds.

Those investors seeking to track the stock market, rather than striving to outperform it, generally command lower fees.

The fresh approach would see annual fund manager fees tumble from £925,000 to £650,000 – saving the local authority nearly £1.5 million over five years.

Mr Gray also suggests reducing the proportion of reserves invested on equity markets from 75 per cent to 55 per cent.

On Wednesday a full SIC meeting will see councillors asked to terminate their mandate with GMO, which has delivered a “benchmark” return in the past five years.

Mr Gray notes the council had “received a ‘passive’ management performance but has paid for an ‘active’ ” one. GMO failed to meet its target of outdoing the market average by one per cent.

He proposes that Baillie Gifford be tasked with managing 42.5 per cent of the £200 million reserve fund. That would be split between equities and a new “diversified growth fund” to allow the council to “exploit short term opportunities in volatile markets”.

Black Rock would invest 30 per cent of the reserves in “passive” equities, and Insight would handle the remaining 27.5 per cent in a mixture of bonds and cash.

Those – including Lerwick South councillor Jonathan Wills – who wish to see the reserves invested more ethically are likely to be disappointed. Mr Gray’s report does not recommend seeking out more morally virtuous investments.

Jonathan Wills has consistently called for more ethical investment.

Jonathan Wills has consistently called for more ethical investment.

Earlier this month Dr Wills was among those suggesting the SIC’s increased responsibility for healthcare meant it ought to follow the NHS’s lead and cease investing in tobacco firms.

Mr Gray’s report says the issue is “challenging for all local authorities” because of “competing objectives of complying with legislation to ensure that members seek the highest returns possible… at the expense of being able to promote a truly ethical policy”.

The best financial returns “often come from those companies that members may not find socially desirable”.

Councillors are also being asked to approve an updated medium-term financial plan aimed at safeguarding SIC reserves at or above £150 million.

If this year’s ambitious spending cuts are achieved, it will leave the council with £10.5 million more savings to make in the next three years.

Mr Gray wants councillors to agree to create a new £15 million “equalisation fund” to smooth out the impact caused by big rises or falls on the fickle money markets.

Should members approve – and stick to – the new plan, Mr Gray says the SIC will “be in a far stronger financial position than it has been for many years, and will require no further savings after 2016/17 as it will be in a financially sustainable position”.

In fact, despite the wider UK public spending outlook remaining “bleak”, the plan would allow a gentle rise in spending following the next council elections. That could put an end to what, by then, will have been almost a decade of cuts.

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2 comments

  1. I have previously commented on this matter and would stress that SIC should not consider the use of Passive funds. Yes, these are cheaper but over the long term they do not perform as well. Independent analyses should be undertaken.

    Shetland Islanders are going to need the returns from these investments for a very long time and they need to have the very best management.

    No rash moves, please

    Reply
  2. Johan Adamson

    I wondered why it is only Baillie Gifford in the frame, surely they get fund managers to pitch for the business and need training to understand the passive and active as MB states above?

    Reply

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