Some of the largest pension and sovereign funds in the world, including AustralianSuper, gathered in late October in Hong Kong for the annual Pacific Pension Institute roundtable. GREG BRIGHT reports on the big themes and concerns discussed.

Many of the Pacific Pen­sion Institute members who attended the latest roundtable were a little bemused by its theme: ‘Managing Risk in the Face of Austerity’. Those bemused ones, mainly from the Asia-Pacific region, had not seen much austerity impacting their funds, and thought it was unlikely that they would do so in the foreseeable future.  European and North American funds, on the other hand, thought the theme entirely appropriate to their worlds. And so developed another theme – the emerging world has become dislocated from the emerged.

The emerging world has weathered the storm already and is planning its next growth spurt, with or without the West.  The North American-based Institute, which has about 32 pension fund members plus corporate (funds managers) and associate members and ‘friends’, attracted a record 185 attendees to Hong Kong, October 27-28, to discuss the state of the world with a particular emphasis on what is happening in Asia. There were representatives from 23 countries present.  The biggest concern from Asian funds, according to Nobusuke Tamaki, director general of the planning department of the Government Pension Investment Fund of Japan, is liquidity. There’s too much money, prompting the possibility of bubbles.

His fund, though, is the biggest in the world, with assets of about US$1.4 trillion.  US and European corporate funds are worried about their under-funding, which has become a whole lot worse in the past three years.  And all funds, according to Laurence Greenwood, vice-president of operations of Asian Development Bank, are concerned about political influences in a time of economic uncertainty.  “There is a lot of cash sitting around in piles which, in times like these, are very tempting for governments to get their hands on,” he says.  On the impact on markets of the growing schism between East and West, Mark Delaney, chief investment officer of AustralianSuper, notes that the demise of the West had been going on for 15 years.  “There has been a mutual dependence between the two for 15 years and now it’s broken,” he says. “The West is coming out of a cyclical downturn but the structural factors will go on for another 10 to 15 years.”

The big drivers of the past 30 years, according to Brian Baker, a director of bond manager PIMCO Asia, have been deregulation coupled with globalisation and downward pressure on interest rates. Financial innovation and leverage fuelled the crisis which followed. “Now, they’re all unwinding,” Baker says. “There’s re-regulation, de-globalisation and more balance … But with low interest rates, if you have long-term liabilities, it makes them much more burdensome. You are not getting well compensated for the potential inflation risk. The public sector may have to cut back on their [pension] benefits, such as we are seeing in some American states.” Delaney goes a little further. He wonders whether, at some point, sovereign debt in developed markets may become unsustainable and inappropriate as an investment. “We’re not there yet, but we might get there,” he said.

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