Funds managers, pension  trustee boards and fund members  should adjust to a low-returns  environment and think carefully  about investment risk in such  uncertain times, warned Tim  Gardener, global head of consultant  relations at AXA Investment  Managers (AXA IM) and a veteran  of the UK asset consulting industry.  Tim Gardener, who was global  CIO of Mercer before joining AXA  IM, was in Australia during May  and told delegates at investment  roundtables that communicating  this reality to all fund stakeholders  was vital to secure long-term  investment returns.  “God didn’t come down from  the mountain and say you can  always have 10 per cent returns on  your investments, and I do think  that this is a period where we will  get lower returns and people just  have to get used to it,” he said.  “The danger is [that] if they  don’t get used to it, investment  managers will go in pursuit of  riskier and riskier investments to  try and maintain returns.” 

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.”

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