Such strategies would stray from the core purpose of pensions: to deliver long-term, risk-adjusted returns. Gardener said the investment industry should look at ways of truly focusing on long-term objectives and not be too distracted by short-term performance rankings or market ‘noise’. “There are a number of things you can do, and none of them are a silver bullet, but the prize is so worthwhile that they are worth doing.” Such as: presenting information to members and boards that emphasised long-term aims and objectives; eliminating market-capitalisation indexes as benchmarks; and implementing governance processes – rather than just talking about them. Contrary to popular opinion, Gardener argued that the global financial crisis was not caused by dishonest bankers and incompetent regulators but by a misreading of investment risk. “It is not very newsworthy, but what caused the great financial crisis is that everyone had the same mean-variance risk models and statistical risk models,” he said.
“While they may have had different forms, these risk models were all giving the same message: that risks were manageable and the problem is that statistical models have their limitations.” He said investment managers should look for the “build-up of pressure” in the financial system – such as the untrammeled securitisation of US mortgage debt before the financial crisis – as an indicator of the next “financial earthquake”. Rejecting the notion that the financial crisis was a so-called “black swan” event, Gardener said market tumults were likely to happen again because there was little evidence the “buy more, work less” approach of Western societies had changed. He said current inflation worries were an indication that pressure was again building in the global economy. “If you start looking at events in this way – if you think of them as earthquakes – then you don’t know when or where, and you know it isn’t going to be exactly like the last one,” he said. “But the one thing you do know is that it is going to happen.”