Contact: David Wilson, ext 7407

1 Introduction

1.1 The Fund's business plan, reviewed at item 7 on this Agenda, stipulates that, as part of the Panel's role of ensuring that its managers are providing value for money, it should:

· Review the level of management fees paid to its managers in the previous 12 months in the autumn of each year

· Review the level of transaction costs, in particular brokerage and stamp duty, incurred in the previous 12 months, also in the autumn of each year.

1.2 This report:

· Reports fees paid to the managers in the year ended 30 September 2004

· Sets out the transaction costs chargeable to the Fund incurred by the managers in the year ended 30 September 2004.

1 Managers' fees

1.1 Fees paid to the managers in the year ended 30 September 2004 are summarised in the table below:

1.2 Excluding property and actuarial fees, the average fee percentage of 0.18% is slightly lower than reported to the Panel in November 2003 for the year to 30 September 2003 of 0.19%.

1.3 Schroders remain by far the least expensive. Their role had been to act as an anchor for the Fund, and this was reflected in their previous less aggressive target of matching CAPS median performance. This was why their relatively modest fixed fee was agreed. They continue to charge this fixed fee despite their switch to a more active target of 1% outperformance of the benchmark from 1 July 2002.

1.4 Of the three main fund managers, SGAM charge the highest fee as a proportion of portfolio value. This mainly reflects their relatively high first-tier charge of 0.35%. Their fee for portfolio values in excess of £300m was negotiated down from 0.25% to 0.2% when they were appointed.

1.5 It should be borne in mind that the achievement of good performance is the prime objective. The difference between the fees charged by Schroders and SGAM is equivalent to annual performance of just 0.17% a year. The difference between Deutsche and SGAM is much lower at only 0.05% a year. All three managers are working to a target of 1% outperformance per year net of fees. Performance returns calculated by Russell Mellon are gross of management fees, but net of transactions costs.

1.6 Fees paid to Cordea Savills for the management of the property portfolio have risen by over 28% compared with the previous year. The main reason for this has been the charges made by Cordea Savills for working on the sales of Stafford and Bracknell, and for surveying work on the refurbishment that has been taking place at Kenley. Unlike the other managers, a large proportion of Cordea Savills' fees are based on their activity, like purchases, sales and rent review work. The other costs of running the property portfolio have risen by over 250%. This is a direct result of the cost of the refurbishment work at Kenley. In part, these costs are the equivalent in the property market of the other managers' transaction costs considered in the next section. It should be borne in mind that, although management costs are high, the property portfolio has performed relatively well in recent years.

2 Transaction costs

2.1 Direct transaction costs are made up of brokerage commission and, on purchases of UK equities, stamp duty.

2.2 The following table sets out only the costs incurred by the managers on transactions in the year ended 30 September 2004.

2.3 Transaction costs were 0.13% of the Fund's total value, slightly lower than last year's figure of 0.14%.

2.4 Schroders and Deutsche place considerable emphasis on the need to minimise trading costs. They actively manage their broker relationships and use their strong position in the market to make sure they receive first-class execution services at the most competitive commission rates. When appropriate they use programme trading to package transactions together, achieving savings through economies of scale. Since January 2003, Deutsche have made asset allocation adjustments using their Asset Allocation Fund. This has lowered transaction costs on their portfolio, as such costs are only payable on their stock selection activities.

2.5 SGAM's transaction costs are higher than the other two main managers. A major reason for this continues to be their relatively high level of UK equity transactions, where stamp duty at 0.5% is chargeable on purchases. Performance figures are calculated net of transaction costs, so if SGAM are to achieve their target they will need to recover these relatively high costs by higher performance returns. There is, therefore, a strong incentive for SGAM to minimise these costs within the context of achieving efficient and timely settlement of deals to capture performance gains.

Recommendation

1 That this report be noted.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

None.