Sensible people are embracing unsensible risk in current markets, says Rob Prugue, principal consultant at Callidum Investment Research.

Speaking on Market Narratives, a podcast series hosted by Investment Magazine’s head of institutional content Alex Proimos, Prugue said no amount of QE from central banks would sustain irrational investor behaviour and superannuation funds needed to rethink investment goals.

“Somehow we appear to have morphed into a new environment where profits are privatised and losses are socialised, so even if the Fed doesn’t bail you out the government will,” Prugue said.

“Would any government allow a large superannuation [fund] to go belly up?” he asked. “I sincerely doubt it.’’

Pruge called for fund managers to consider if they are a wealth management business or a retirement business and, if retirement, to align investment goals with CPI.

“The reality is the numbers for many CIOs (chief investment officers) are incentivised for ranking there’s a disconnect here,’’ he said.

Australian superannuation members tended to favour those funds that had done well over three to five years and reward them with positive ratings while incentivising the investment team.

“CIO remuneration based on funds embracing risk to achieve something different to CPI plus is wrong,” he said. “Agency driven by league tables is kicking [at] the wrong goal post.’’

Prugue points to the CIO of a defined benefit fund for UK pharmacy retailer Boots PLC, who targeted returns of CPI+3 per cent towards the end of the Dotcom boom in early 2000. In the boom market, the fund reached its target and was fully funded with a 10 per cent cushion when the CIO decided to sell assets and buy inflation index gilts at CPI+4 per cent.

The Index-linked bonds, issued by the UK government to help mitigate the impact of inflation, proved a good investment when the correction hit later in 2000 and the CIO was lauded as an investment guru.

The CIO, however, said he was merely managing his objective of CPI+3 per cent.

Funds targeting return over risk had been going on for a long time and it had not been challenged enough, he said.

“Do they have league tables for DB and varied annuities in other markets?

“These league tables and heat maps are encouraging irrational exuberance forcing members to take on levels of risk. I say get rid of tax incentives, don’t let taxpayers subsidise saving schemes so (the industry) can create a wealth management business,’’ he said.

Prugue suggested the solution was creating more “diversity of thinking” in fund boardrooms.

“It’s not about hiring from the same golf clubs,” Prugue said. “Funds and fiduciaries need strategies to perform when a change is coming.’’

Instead of attempting to forecast where markets would head post-Covid-19, funds’ time would be “better spent on tools to adapt and for the board to write guidelines for the CIO to follow – say a five-year time frame.”

To listen to the recorded interview with Rob Prugue on the Market Narratives podcast click above or find the series on Apple Podcasts, Google Podcasts or Spotify.

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