UK - Gwynedd Council appointed Fidelity International to manage an active global equity mandate earlier this year, but it is now holding back some of the investment until the firm establishes an emerging market select fund.

The Welsh council revealed the appointment of Fidelity at the February meeting of the pension committee, but an update to the council last month revealed that while the assets have now been transferred to the investment manager the terms of the mandate had altered slightly. (See earlier IPE article: Gwynedd tenders active bonds portfolio)

In September 2008, Gwynedd tendered for a new global active equity manager following the termination of a UBS contract in 2007 for a portfolio valued at around £150m (€173.6m). (See earlier IPE article: Gwynedd drop UBS in search for active equity)

However, the official contract award notice revealed the mandate is now valued at £116.4m, with an "anticipated outperformance objective of 2-4% against the MSCI AC World Benchmark".

In a report to the pensions committee last week, Dilwyn Williams, corporate director at the council, revealed that although originally 20% of the value of the fund was meant to be transferred to Fidelity for the mandate, only 18% had been transferred.

The committee was told the original intention was for Fidelity to invest Gwynedd's assets in their global select strategy on a pooled basis, rather than separately, against the MSCI AC benchmark index, of which 9.5% of the assets are meant to be in emerging markets.

But the report admitted: "It became apparent a short time before the transfer that Fidelity's Global Select Fund did not have any investment in emerging markets but they intended to start a Select Fund that invests such markets in future but it will not be available for some months".

The council had the option of investing in another Fidelity fund offering emerging markets exposure, but the pension fund's advisers Hymans Robertson recommended the 'select' strategy of investment managed risks better and was more likely to provide "constant outperformance in the long-term".

Gwynedd had the choice of transferring all 20% to Fidelity's global select fund and transferring them out once the new emerging markets fund is available; transferring 18% to the global select fund and 2% to the alternative existing Fidelity emerging markets fund and then transferring again when the new select fund is established.

Instead, it agreed to place 18% with the Fidelity Global Select Fund and keeping 2% in the Legal & General portfolio - which has access to the UBS emerging market fund - before transferring the remaining 2% to Fidelity once the emerging select fund is up and running, as it highlighted the first option goes against the asset allocation set for the fund and the third is against recommendations on controlling risk.

Meanwhile, Williams also noted in the report that at a meeting of the investment panel in February the "performance fee offered by Fidelity was raised".

The council admitted it was not "entirely comfortable with the proposed fee and Hymans Robertson was asked to go back to them to see if we could renegotiate, as there was a feeling that the threshold at which [Fidelity] would gain was too low".

As a result, William confirmed a compromise had been reached by changing the percentages payable at different performance levels, so essentially if the performance is less than 1% above benchmark than the council will benefit from the fee structure, but if the performance is between 1-3% above the benchmark then the Council will be "worse off".

Elsewhere, documents from the latest committee meeting revealed at the end of March 2009 the funding level of the £793m pension scheme had fallen to 56% from 84% at the last valuation in 2007, which would mean that if the triennial valuation had been this year employer contributions could have seen an increase from 20.1% to 30.2%, of which 13.4% would go to repairing the deficit.

As a result the committee was told: "in view of this poor prognosis it is recommended that we contact all the employers in the Fund now to inform and warn them of the situation."

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