Tim Gardener, one of the biggest names in UK asset consulting until he crossed to funds management last month, has distilled his views on pension fund governance after 20 years at the advisory coalface, writes SIMON MUMME.
Outlive your survival instincts
Humans are hard-wired to herd. In risky situations, our primal instinct is to seek safety in numbers. Straying from the pack exposes us to the dangers of isolation: predators, injury, disorientation. For professional investors, the chief benefit of herding is the mitigation of career risk. There is no other upside. Herding generates momentum, which fuels asset bubbles that can last for years. Each time, some investors will be convinced markets have reached a new plateau. Others will buy-in because profits – no matter how unjustified – are irresistible. Yet bubbles burst inevitably, and these exercises in herding end in tears for most. Second coming for the Third Age
In addition to Australian Unity Investment’s recent launch of its retirement village property fund, Aviiid, another manager in this market, has announced its A-CARES #1 fund, said Scott Marinchek, managing director of Aviiid Third-age Living. The Aviiid fund would be Marinchek’s second tilt at this market, having exited Mariner Financial’s third-age living fund in late 2008 amid the parent company’s troubles. But his attitude towards the village market remained upbeat. Aviiid’s Care & Accommodation Real Estate Securities Australian Fund would be an unlisted, 10-year closed-ended vehicle specifically established to provide sustainable cash distributions to institutional investment partners.
PanAgora’s risk parity guru warns on misuse
Edward Qian, CIO of PanAgora Asset Management, coined the term “risk parity”, but he said there are misconceptions about how the approach used leverage which, if used incorrectly, undermined its essence – risk diversification. Qian, who is chief investment officer of macro-strategies and head of macro research for the firm, said the concept of risk parity, first and foremost, was diversification and to manage how risk was controlled. “For too long investors have let markets dictate that,” he says, “whether it’s been through capweighted indices and the risks in 60:40 portfolios dominated by equity risk. Portfolios dominated by equities investors have been hit by multiple directions.”
Super funds, say hello to the zero-sum world
For superannuation funds, the membership pie has begun its inevitable decline – and fast. The total number of accounts in the system peaked at 34 million in the last year and will fall as the rate of membership growth falls and the tax office pulls small accounts it deems as ownerless from the system, according to researcher SuperRatings. The rate of membership growth fell from 6.1 per cent in 2005 to 2.5 per cent in 2009 (see table), and shows no signs of abating as account consolidation continued and the tax office claimed small balances with no fixed addresses, Jeff Bresnahan, managing director of the ratings agency told the 2010 Day of Confrontation. The era of automatic membership growth for all funds had ended, he said, and a period in which growth could only be achieved by winning market share from competing funds in a zerosum game had begun. “The free ride is over. Competition is here in a big way.”
Few stars in the very bleak venture capital universe
For venture capital investors, the days of receiving 100-plus per cent internal rates of returns (IRRs) from a broad sweep of managers are gone. But this doesn’t mean investors should give up searching for the few remaining outperformers. During the dotcom fervour of the late 1990s, the boundary marking top-quartile IRRs soared beyond 70 per cent in 1997, and then fell sharply to about 6 per cent in 1999. Since then, returns from managers across the industry “have struggled to recover”, wrote research house Preqin in its special report, The Venture Capital Industry. According to Preqin, which tracks the performance of 70 per cent of venture capital funds, 52 per cent of managers posted IRRs of 20 per cent or more in 1997, the industry’s golden year.
Beware the $A’s ‘fair-weather friends’
Given the roaring Australian dollar (A$), institutional investors should be buying good-value companies in the US, UK and Europe while they can and giving the so-called PIGS countries – Portugal, Ireland, Greece and Spain – a wide berth, said Wingate Asset Management’s CIO, Chad Padowitz. But, at the same time, the A$ was in a precarious place, he warned. “It has no enemies, and when someone has no enemies, that itself is the enemy. The A$ is loved by everyone, but they’re fairweather friends. They’re not here for the long-term story. “It’s the Dutch-tulip disease – the longer [the A$] stays up, the worse the crash will be,” Padowitz said.
Equity managers split on emerging markets tactics
Accessing emerging market themes through MSCI World stocks was a “blunt instrument” and unjustified given the improvements in the developing world’s corporate governance and sovereign risk, according to Martin Currie CEO Willie Watt. But Jeremy Podger, executive director of global equities at Threadneedle, argued that developed world companies which source much of their revenue from emerging markets provided investors with a cheaper way of benefiting from fast-growing markets such as China, India and Indonesia. The Edinburgh-based Martin Currie is only just bedding down a global emerging markets capability, which Watt admitted some investors were surprised to hear, given the firm’s well-known Chinese, Japanese, Asia ex-Japan and global equity teams.
Access consulting chief jumps to client
Access Capital Advisors (Access CA) appointed a new head of asset consulting after the incumbent left the business to take a senior investment strategist role with major client Cbus. Tim Ridley will depart next week after three years with Access CA, taking the senior role in Trish Donohue’s investment team at Cbus, the $13 billion industry fund, which holds a direct infrastructure mandate with the deal-making side of the Access CA business. The new head of asset consulting will be Ross Blakers, who had spent four years at Access CA after joining from the Australian Office of Financial Management, where he focused on credit and interest rate risk management, Alexander Austin, CEO of Access CA, said.
Sunsuper parks upsized EM allocation in ETFs
The $16 billion Sunsuper has allocated an additional $200 million to emerging market equities, but is achieving the exposure through exchange-traded funds (ETFs) selected by its transition manager as it investigates whether the approaches of any active managers “make sense” in the fast-growing markets, according to chief investment officer David Hartley. Combined with its existing allocation to AMP Future Directions’ multi-manager emerging markets vehicle, the $200 million boost would bring the emerging markets component of Sunsuper’s offshore equity exposure to approximately 20 per cent, Hartley said.
Keep friends close, but PPP consortiums closer
The major risk for equity investors in greenfield infrastructure is not their consortium’s ability to accurately forecast the patronage of assets, such as toll roads, but dealing with the conflicted interests within bidding parties themselves. Investors became exposed to “agency risk” as they engaged with investment banks and construction companies to develop bids to build public-private partnership (PPP) assets, Richard Hoskins, head of unlisted infrastructure at Hastings Funds Management, said. Since builders were incentivised to win the construction contract, and investment banks to earn fees on the transaction, they were driven by the prospects of more immediate payoffs than investors, which earn fees on committed capital over many years. “Australia is a builder-led market.
Funds face the perils of parity
Fiduciary investors claim to have learned their lessons from the Australian dollar’s freefall during the second half of 2008, and are prepared for the possibility of a dramatic retreat from parity with the US$. The chief investment officer of the $30 billion AustralianSuper, Mark Delaney, said the fund’s policy for some time had been to hold a 17 per cent foreign currency exposure within its default balanced fund. “We always review that number, but we’ve yet to see any reason to change it,” he said. “Hitting that $1 US mark, it’s obviously a high-profile figure but in practice it’s just the continuation of a long-term trend of US dollar decline.”
