The Lord Chancellor's Strategic Investment Board (SIB) is an advisory non-departmental public body set up by the Lord Chancellor at the beginning of 2001 to advise on the investment activities of the Public Guardianship Office, the Official Solicitor & Public Trustee Office and the Court Funds Office. All are within the remit of the Lord Chancellor's Department. Prior to 1 April 2001, their investment activities were the responsibility of the Public Trust Office, which was abolished on that date.
The setting up of SIB was one of the reforms announced by the Lord Chancellor in Making Changes (April 2000), in which he set out his response to the criticisms made by the Public Accounts Committee and the subsequent recommendations made by Ann Chant in her Quinquennial Review of the Public Trust Office (PTO) and the report by Patrick Gifford, a member of the Honorary Investment Advisory Committee (HIAC), on how to progress the Review's investment recommendations.
This, the first SIB annual report, covers a 15-month period from SIB's inception in January 2001 to the end of March 2002.
The programme of work proposed for SIB at the time of its inception included various items (e.g. reviewing the PTO's investment codes and guidelines) which presupposed the continuation of the existing strategy and investment management structure. The Board decided that before proceeding with these items it should review the basic assumptions underlying the investment strategy, and in particular the level of investment risk to which clients' assets should be exposed and how this could best be achieved. This in turn led to a review of the asset classes available, the strategic asset allocation process and the benchmarks against which investment performance was being measured.
Against the background of this review the Board has been developing a set of recommendations, summarised in section 4 of this report, which involve some significant changes to the previous investment strategies being pursued by the agencies concerned. Following extensive discussion and debate SIB's recommendations were put to the Lord Chancellor in December 2001 and received his support.
A programme of work to implement these recommendations has been started and will be completed in the early part of 2003.
In developing its investment strategy recommendations SIB's principal aim is to devise policies and procedures which are clear, workable and which will help to ensure an appropriate level of exposure to investment risk for the clients of the agencies involved. At the same time SIB is mindful of the fact that it is the staff of the PGO, OSPT and CFO who will be responsible for the execution of the new strategies and is therefore trying to ensure that clear, straightforward and robust procedures can be put in place to achieve this.
During the current year ending March 2003 SIB's efforts will be focused on supporting the implementation of the new investment management arrangements. In addition to taking part in the selection process for new fund managers and stockbrokers this will include advising on the transition process involved in moving from the old to the new arrangements, including the establishment of new benchmarks and key performance measures and monitoring the performance of investment managers and custodians.
In taking forward the programme of work described above I have been in the fortunate position of being able to draw upon the expertise of my fellow board members, who between them have a wealth of experience in the financial services sector, gained not only through hands-on involvement in the investment management process but also in the areas of research, analysis and financial regulation.
Four members of HIAC, the body that had previously advised the PTO on investments, agreed to join SIB for a transitional period to provide continuity and their insights and advice have been much appreciated.
I would also like to acknowledge the help and support provided during this formative stage in the evolution of SIB's activities by officials in LCD headquarters and by the staff in the Court of Protection, the Public Guardianship Office, the Official Solicitor & Public Trustee Office and the Court Funds Office.
Colin Price
Chairman
The Board is independent and non-executive and comprises a Chairman and five members, all drawn from financial services backgrounds, as well as a number of ex-officio members from within the business areas.
The membership of the Board during the period from 1 January 2001 to 31 March 2002 included the following:
| Chairman | ||
| Dr Colin Price | Formerly Global Advisor to Shell Pension Funds, Finance Director of Shell Pensions Management Services Limited and a Board member of IMRO. | |
| Appointed members | ||
| Mrs Patricia Challens (Retired 7 March 2002) |
Formerly Director, Relationship Management, Deutsche Bank AG London (Stockbrokers) and Appointed Member of Covent Garden Markets Authority. | |
| Mr Alan Clifton | Holds several non-executive directorships. Formerly Managing Director of Morley Fund Management Limited, the fund management arm of CGNU plc (now Aviva plc). | |
| Mr Patrick Gifford (Retired 22 January 2002) |
Chief Investment Officer of NIB International and holds several non-executive directorships. Formerly Director of Robert Fleming Holdings and Chairman and Chief Executive of Fleming Investment Trust Management Limited. | |
| Mr Andrew Hutton (Appointed 8 March 2002) |
Head of Investment Management at Coutts Group. Previously Managing Director, Head of International Mutual Funds at JPMorgan Investment Management. | |
| Mr Laurence O'Mara (Appointed 8 March 2002) |
Managing Director of Lombard Odier Private Asset Management, a post he has held since 1994, having previously been Head of the European Department of the Kuwait Investment Office. | |
| Mr David Ritchie | Holds several non-executive directorships. Formerly Deputy Group Chief Executive of Scottish Widows and Executive Chairman of Scottish Widows Investment Management Limited. | |
| Prof Janette Rutterford | Professor of Financial Management, Open University Business School. Consultant and author in the fund management field. | |
| Mr Ian Sands (Retired 7 March 2002) |
Formerly Director and Chief Operating Officer of Lazard Capital Markets. | |
| Mrs Challens, Mr Clifton, Mr Gifford and Mr Sands previously held appointments to the Lord Chancellor's Honorary Investment Advisory Committee, the predecessor to the Strategic Investment Board. | ||
| Ex-officio members | ||
| Mr David Lye (Appointed 13 August 2001) |
Chief Executive of the Public Guardianship Office | |
| Mr Andrew McDonald (Resigned 13 August 2001) |
Acting Chief Executive of the Public Guardianship Office | |
| Mr Nick Smedley (Resigned 25 May 2001) |
Acting Chief Executive of the Public Trust Office and subsequently of the Public Guardianship Office | |
| Mr Laurence Oates | Official Solicitor & Public Trustee | |
| Mr Ian Hyams | Director of the Supreme Court Group | |
| Master Denzil Lush | Master of the Court of Protection | |
| Secretary | ||
| Mr Alan Palmer | ||
| The Chairman is remunerated at the rate of £15,000 per annum and the appointed members at the rate of £10,000 per annum. | ||
The Lord Chancellor's Strategic Investment Board is appointed by the Lord Chancellor to (1) advise on the appointment of appropriate external managers to invest the client monies coming within the care of: the Public Guardianship Office; the Official Solicitor & Public Trustee Office; and, where appropriate, the Court Service; (2) monitor their performance against established industry benchmarks; and (3) provide advice on strategy and specific investment matters including guidelines for external managers.
In the discharge of this function the Board will, in particular:
a) Advise on management arrangements; on the appointment of managers and advisers to all accounts; on fee arrangements; and on custody arrangements;
b) Advise on the benchmarks and guidelines given to managers appointed to manage the funds, to include review of guidelines as to diversification, risk, use of derivatives and counter party risk, and review of exceptions where a non-standard policy is required;
c) Assess the performance of all managers appointed to manage clients' funds; at such times and in such manner, and including advice on such points, as shall be specified by the Chief Executive of the Public Guardianship Office.
The Board may also advise on such matters related to investment of Public Guardianship Office, Official Solicitor & Public Trustee Office and Court Service funds as may be requested by the Lord Chancellor, or agreed with the Chief Executive of the Public Guardianship Office.
Investment strategy developed, allowing better control over investment risk
The Strategic Investment Board (SIB) undertook a review of investment strategies for use by the Public Guardianship Office (PGO) in respect of its clients and made proposals that were accepted by the Lord Chancellor. In its submission to the Lord Chancellor, SIB recommended:
taking account of the fact that the key determinant of investment risk and investment returns is strategic asset allocation and implementing policies which explicitly address this;
providing a range of investment strategies for PGO clients which achieve a more efficient trade-off between risk and return than those currently in use;
revised performance benchmarks which are designed to measure the returns achieved by these investment strategies;
the setting up of a bespoke LCD pooled equity fund;
using a passive (index-tracking) rather than an active fund manager to manage the pooled equity fund; and
using PGO staff in an administrative role in relation to asset allocation.
In its review, SIB identified the allocation of a portfolio between the major asset classes (equities, bonds, cash etc) as being by far the most important decision to be taken when developing an investment strategy, involving a trade-off between risk and return. It therefore recommended that the PGO re-structure its current investment strategies for clients by applying new performance benchmarks that reduce the risk profiles inherent in the existing policy. This could be achieved by making greater use of the LCD's Special (cash) Account with the Accountant General and its favourable rate of interest (currently 6% per annum gross), and by periodically reviewing the allocations between equities and cash and when necessary rebalancing the portfolio back to the strategic benchmark.
Advice given on future fund management arrangements
Clients' assets can be managed as segregated portfolios or by investing in unitised pools of assets, such as unit trusts. Pooled investment vehicles are normally more cost effective, since it costs less to manage one large pool of assets than to manage a large number of smaller portfolios, and this approach will also result in lower dispersion of investment returns between clients. In addition, performance analysis based on total returns can be achieved more quickly and easily for pooled funds. SIB has therefore advised that in normal circumstances pooled vehicles should be the preferred approach for LCD clients.
SIB has also advised that passive investment (the use of funds that track an index) should normally be employed for LCD clients in preference to active investment (where a fund manager seeks to select stocks which will outperform an index). Based on historical evidence, this is likely to produce more consistent performance at lower cost.
Implementation of these proposals by the creation of a pooled equity index tracker fund is currently being planned.
At present the investment portfolios of a large number of PGO clients are handled by panel stockbrokers. SIB have concluded that, even with the introduction of an equity index tracker fund, in accordance with Ministerial policy and that of the Court of Protection, receivers acting on behalf of mental health patients should still be able to choose alternative investment advisors. It has been the intention for some time to replace the existing advisory arrangements for panel broker clients by discretionary ones which will enable an altogether more efficient service to be provided. SIB has reviewed the preparations for changes to these arrangements and the intention will be to invite tenders for new panel broker mandates.
Advice given on the strategy to be followed for the replacement of the Common Investment Funds
The Common Investment Funds are the LCD in-house unit trusts set up in 1965 to enable clients with funds 'In Court' (ie individuals under a disability, namely children and patients of the Court of Protection) to participate in equity investment. They comprise two underlying funds - the Capital Fund, which offers growth objectives, and the High Yield Fund, which generates a higher level of income. It has become increasingly apparent that these funds suffer certain disadvantages. In particular, when children reach the age of majority or when patients are put back in charge of their own affairs, any units they hold have to be sold in order for the funds to be passed 'out of Court', irrespective of whether that would be a sound investment decision or of any capital gains tax consequences. A similar situation applies when children or patients die, forcing a sale at a moment which may not be in the best interests of the beneficiaries.
SIB has advised that the proposed LCD index tracker fund mentioned earlier would provide a much more flexible vehicle for all concerned. Subject to resolving the associated tax issues, it has therefore proposed that the current holdings in the Common Investment Funds be transferred into the new fund when it has been established.
Advice given on custody arrangements
SIB contributed to a review of custody arrangements for LCD clients' funds which considered a number of options, including the use of global custodians and of stockbroker nominee companies. With the guidance of the Parliamentary Secretary, it was concluded that the existing custody arrangement with the Accountant General of the Supreme Court and the Bank of England should be retained for the time being. However SIB advised that this arrangement should be kept under close review and alternatives considered should this appear to be in the best interests of LCD clients.
Questionnaire for non-panel brokers
Subject to the approval of the Court of Protection, receivers handling the affairs of PGO clients are permitted to use the services of fund managers and investment advisors other than the panel brokers. At the instigation of SIB, a questionnaire has been introduced for such non-panel brokers. This should lead to an improvement in the quality of the PGO records and will help the PGO to evaluate the standard of advisors who are managing clients' investments and ensure that the services provided are of an acceptable standard.
Critical review of investment performance
Although giving priority to the establishment of new strategies and benchmarks, SIB recognised that it had a role to play in monitoring investment performance under existing arrangements. The external fund managers who are responsible for the management of LCD client investments are required to report regularly on their progress and attend SIB's quarterly meetings in order to respond to questions. During the course of last year, it became apparent that the returns being achieved by one of the panel brokers were falling short of the target levels. SIB led an investigation into the reasons for this underperformance and conducted a review of the investment processes of the firm concerned. As a consequence, new processes are being followed, but the position will continue to be monitored until SIB is satisfied that a genuine and lasting improvement is being achieved.
The setting of new investment strategies and benchmarks for the PGO will lead to an implementation programme in which SIB will be closely involved. There are also various investment related areas that have yet to be scrutinised by SIB. Subject to more urgent matters requiring its attention, SIB work for the year ahead is expected to include the provision of advice on the following:
Establishment of investment strategies and benchmarks for trusts administered by the Official Solicitor & Public Trustee Office and children's funds.
The setting up of a pooled equity index tracker fund to be available for use by all LCD clients, and the transfer into it of holdings in the existing Common Investment Funds. This will include the appointment of a suitable investment manager to operate the fund as well as the establishment of related systems.
An invitation for fund managers to tender for new panel broker mandates with discretionary management of client portfolios as an explicit requirement.
The use of structured settlement facilities for damages awards.
A further review of custody arrangements.