Deputy Jennifer Strachan has calculated that the General Investment Portfolio and the Public Servants’ Pension Scheme have trailed their market benchmark by an estimated £312m. over 2023 to 2025, and fallen an estimated £85m. short of their long-term target.
She said the three-year figures continued a pattern of underperformance against all benchmarks stretching across the four and a half years since the new structure under a new States Investment Board had been in place.
Deputy Strachan described the shortfall as ‘deeply concerning’, and claimed that such targets should be relatively easy to beat in buoyant markets.
P&R said in response to written questions from the deputy that it rejected her claims of poor performance.
It said there was ‘no evidence of significant or consistent underperformance against the long-term benchmark’ and said the current asset mix could meet that long-term benchmark return.
It did admit failings against the policy benchmark and said it was keeping the States Investment Board under challenge and review.
Deputy Strachan said that she was disappointed that two of her questions were ‘not properly answered’ but noted that P&R had not disputed her calculations.
‘I specifically expressed them in money terms to highlight the scale of the issue in terms that would be easily understood, and so the magnitude of the issue was clear,’ she said.
‘After all, one would not want to place money in a bank account that paid interest of 3% less than the market rate for three years.
‘Unfortunately, the responses indicate there seems to be little curiosity about what is going wrong with the repeatedly missed benchmarks, nor even an acknowledgement that there is a problem. To repeatedly underperform the benchmarks year after year indicates that something is going wrong.’
Deputy Strachan used to be an associate director at IAM Advisory, which provided investment advice to the States between 2009 and 2021. It encouraged the use of more local fund managers and kept fee income in the island.
‘An essential part of making this work was our role in managing the fund managers to ensure they were delivering what was expected within a strategy appropriate for Guernsey,’ she said.
In early 2022 the States changed its approach and established the States Investment Board as a specialist body to oversee all the States’ investment funds in a bid to improve governance.
The SIB has appointed advisers and managers since then, including the global investment firm Cambridge Associates in August 2022, following a competitive tender, as investment advisers on all of the States funds.
Deputy Strachan said that she believed the oversight system was not working and said she believed the committee should get some independent advice.
‘I would like these questions to be a wake up call to the States to get its own house in order, and for me this means getting its investments under control. This is arguably, given the scale of the missed opportunity for investment returns, a bigger issue than debates over capping government expenditure and extra taxes.’
P&R said it judged performance in percentage terms rather than sterling, which it said could be distorted. On that basis the general portfolio returned 7.3% a year over the three years against a policy benchmark of 10.3%, while the pension scheme returned 8.1% against 10.2%.
The committee accepted there had been ‘more pronounced’ underperformance against that market benchmark. It attributed this chiefly to illiquid legacy investments that cannot readily be sold, weak returns from some active equity managers and, in the general portfolio, inherited mandates and the Guernsey Investment Fund.
But it rejected the claim of consistent underperformance against the long-term target of inflation plus 5%. It said that measure should not be used to judge success over three years, and that on the latest figures both portfolios were now broadly matching it.
To the end of June the pension scheme had returned 34.07% since the start of 2023 and the general portfolio 31.06%, against 32.83% for the target.
Asked by Deputy Strachan what level of loss, and over what period, would trigger an independent review, the committee declined to set any sterling threshold, calling such an approach ‘unduly simplistic’.
A single figure viewed in isolation, it said, could not show whether the strategy, manager selection or governance were sound.
It also saw ‘little merit’ in a further independent review of the benchmarks. The States Investment Board was a politically independent body of investment professionals, and a review would duplicate work and cost, it said.
The committee said it had held several meetings with the board, challenged it on manager performance and put the local manager programme, the main constraint under its own direct control, under active consideration.