Long-term investors will need a tight hold on costs and conviction to follow a well-defined investment strategy that delivers returns from challenging markets in the years ahead.

Many superannuation funds have already lowered their advertised return targets to manage members’ expectations, because average annual returns are expected to be lower in the decade ahead than in the decade past. It comes as world interest rates are hovering near record lows, global growth is muted and many asset prices are already inflated from a decade of central bank stimulus in the wake of the 2008 global financial crisis.

Institutional investors are turning to niche asset classes, like private debt, to make money in this ‘long and low’ investment environment. To navigate the increasing complexity, institutions will need a well-defined investment strategy to keep them on track to meet their long-term goals.

First State Super chief investment officer Damian Graham said it would also be critical to manage potential leakage points and reduce the costs of doing business.

He said super funds are already getting more sophisticated in how they control costs with different providers, such as funds managers, custodians, advisers, asset consultants and banks.

“Investors are really considering the different leakage points – it’s critical,” Graham said.

Even with the long and low environment expected to persist in the medium-term, Graham still thinks there will be market opportunities and positive outcomes.

“If you look at the rolling 12-year return, most super funds are pretty good,” he said. “We had a strong market recovery post-Trump, so I think there will be good and bad years.”

Like planning a family holiday

Northern Trust Asset Management managing director, Asia-Pacific, John McCareins compared planning to manage an asset pool through a long-and-low environment to planning a family holiday. In each case, a group of individuals must co-operate to determine a common destination and objectives.

“The next piece of [planning the holiday] is to determine how you want to get there – plane, train, car. Similarly, with managing assets, what tools or asset classes are you going to use to achieve said objective?” McCareins explains.

He adds that an anticipation of externalities needs to be built it – be it weather or market challenges – because the best-laid plans are always subject to outside factors. For funds, this means establishing an investment policy statement.

“If you can take the time to establish the common objective, then you can systematically determine your path to get there and agree to be disciplined in monitoring your progress. That gets you 85 per cent of the way there,” he said.

Multiple studies have shown that establishing an investment policy statement improves results, as it checks the outsized influence of individuals on investment decisions.

“The whole idea is to get to your destinations,” McCareins said. “And it allows you take advantage of opportunities.”

One such opportunity investors worldwide are considering is moving into private debt. For investors that are less focused on immediate liquidity needs, private debt represents a potentially attractive alternative in a low-return environment, as they look to capture an illiquidity premium.

“The question folks need to answer is, ‘Am I able to stomach that relative illiquidity and have that longer-term investment horizon to be able to capture the whole benefit of investing in private debt?’ ” said TIAA Global Asset Management (US) managing director, head of senior leveraged lending, Shai Vichness.

Graham, McCareins and Vichness spoke to Investment Magazine ahead of the Conference of Major Superannuation Funds on the Gold Coast 22-24 March, 2017, where they, along with Insight Investment manager, multi-asset strategy group, Steve Waddington, participated in a panel titled Investment Strategy Through ‘Long and Low’.

To read all our coverage from Day One of CMSF, click here.