“Bonds will probably back up [with higher interest rates] when markets recover and investors will lose money.” Delaney says that in the current low-interest rate environment, one begins to wonder what is the role of bonds in a portfolio – “you wonder whether you are actually buying risk rather than insurance”. Several problems with investing in emerging markets were illuminated during the roundtable. Delaney said, for instance, his fund recently looked at appointing a new global emerging markets manager and discovered that a lot of the good ones were closed. A bigger problem, perhaps, is the mainstream benchmarks. Emerging markets represent about 13 per cent of the MSCI All Countries World Index, but about 34 per cent of world GDP. Their share of GDP is expected to rise to about 50 per cent in the next 10 years.
Making matters worse, most pension funds use a mix of indices, rather than the MSCI ACWI, such as the MSCI World, which has no emerging markets, and then various smaller ones as sort-of adjuncts, such as MSCI emerging markets, Asia ex-Japan, or BRICs (Brazil, Russia, India and China), as well as single-country indices. Doug Pearce, the chief executive and chief investment officer for the British Columbia Investment Corporation, says the crisis prompted his fund to look at its asset allocation and how “backward-looking” it was. The fund revised its allocations to move heavily towards real assets and increase emerging markets. “We also redefined markets,” Pearce says. “We no longer think of China as an emerging market… We’re using more external managers and local advisers in emerging markets … And we’re redefining our benchmarks.”
For the Hong Kong Jockey Club funds, which total about US$8 billion, the crisis means a reassessment of the frequency of its asset allocation reviews. Jacob Tsang, director of group treasury for the Hong Kong Jockey Club, says the fund used the exercise to ask its board to allow staff to use some of the strategies which used to be called ‘market timing’. So the fund introduced a dynamic asset allocation approach to supplement its annual strategic asset allocation reviews. It also put in place, in 2009, new private equity secondaries and distressed investments programs. About 20-25 per cent of the funds’ private equity programs are within Asia. Tsang says that, at the portfolio level, the fund also put in place a series of options to cap the downside on its equities exposures.