Super funds need to develop strategies to ensure that investment gains enjoyed in bull markets are not given back when the cycle turns, and lifecycle strategies can play a part. Investors are exploring them as an opportunity to protect and to retain members, particularly those on the cusp of retirement or in the early decumulation phase. SIMON MUMME and PHILIPPA YELLAND report on a sophisticated roundtable discussion between superannuation fund CIOs, actuaries and retail platforms.
Why governments should sell longevity bonds
The purpose of a pension plan is to hedge longevity risk, but many funds have not adequately offset this simple fact of demography. AMANDA WHITE reports.
Funds seed for the future
Two major pension funds from the Netherlands and Canada – ABP and OMERS – have seeded an innovation and technology program to invest in their domestic knowledge economies. Called inkef capital, it has already begun searching for the success stories of the future. SIMON MUMME reports.
Geek fights – the Cliff Asness way of vigilantism
In some ways, Cliff Asness is a classic hedge fund manager. He’s got the money, works in Connecticut and reveals the mechanics and performance of his flagship absolute return fund only to investors. But in other ways, the boss of AQR Capital Management is an agitator for change. His latest campaign – in a career claiming many intellectual victories to date – is to demystify the sources of return within hedge funds. This is the type of battle that has defined AQR’s culture, its investment ideas and competitiveness. But there’s a deeper story here. SIMON MUMME reports. Funds management: is it good for society?
Funds management can be tough work. Often, it demands intelligence, discipline, resilience – some of humanity’s admirable qualities – and its own version of hard yakka: ‘sweat equity’. Society is supposed to benefit from this as, over time, institutional managers discipline companies. Without them, “no-one’s out there even thinking about what the proper price of a security is,” says Cliff Asness, founder of AQR Capital Management. “And just because we’re occasionally susceptible to mass delusion, it doesn’t mean we don’t have a far more efficient economy because someone is in there, day-in, day-out, thinking about how securities should be priced in relative and absolute senses.” Substantiated by capital flows, institutional managers’ views are an essential input into functioning free-market economies. ESG index launches on Shanghai exchange
In a sign that environmental, social and governance (ESG) risks are becoming a greater concern in China, the country’s first ESG index launched in mid-September as a joint venture between the main Shanghai exchange and an Italian research company. The Shanghai Stock Exchange’s research centre director, Professor Ruyin Hu, said the China Securities Index Company (CSI) was working with ECPIT, an Italian company which specialises in sustainability research and ESG index construction. Professor Hu said ESG issues were becoming a greater concern for the Shanghai exchange and this had led to building the new CSI ECPI China ESG 40 Equity Index.
Mercer prompts risk–return rethink for global equities
With the dust hopefully settling on the financial crisis, super funds should take the opportunity to rethink how they put together and benchmark their global portfolios in keeping with the way the world is developing, according to Mercer Investment Consulting (Mercer IC). A seminal paper published by Mercer IC last month urged pension funds around the world not only to question their standard global equity benchmarks but also to look at better ways to protect their positions in down markets. The net result, for funds which go down this path, would lead to a new way of looking at asset allocation – focusing on risk premiums rather than allocations to buckets of asset classes – and a new form of portfolio construction whereby defensive assets were redefined to better do the job in times of stress when correlations head to one.
Commodities, emerging markets funds run the gauntlet
There are eight “gauntlets” that any managed fund will have to run over the medium term, according to Investec Asset Management investment strategist Michael Power, and while a Japanese equity fund might be lucky to meet one of them, funds investing in commodities or the emerging markets would satisfy almost all eight. One key “gauntlet” was a fund’s ability to “surf the carry trade out of the West and into the rest”, Power said. The fund should also “avoid dollar blindness”, Power said, by not achieving a majority of its returns in the form of US dollars, which the strategist said was declining and fading as the world’s reserve currency.
You want long-term value? Then pay for it
Our obsession with quarterly corporate earnings is a market failure, according to Colin Melvin, CEO of Hermes Equity Ownership Services, and could only be corrected by action from institutional asset owners. Some years ago, a global collective of institutions and funds managers, including the $15 billion HESTA, pledged to collaborate and produce high-quality, longterm investment research that in part sought to redress this market failure, Melvin, a shareholder engagement specialist, said. This research was called the Enhanced Analytics Initiative. The outcome was great research that was never really used by funds managers, he told the 2010 AIST Australian Super Investment conference last month. He said asset owners should overhaul the terms of the mandates they issue to managers so they are paid for proven long-term investment performance, not quarter-to-quarter rankings.
Game on for active equities
The pressure is on. Chris Alderson, CEO of the international arm of T. Rowe Price, said one of the major challenges facing the active equities manager was the need to prove its ability to consistently outperform as institutional investors plough more capital into passive investment strategies. The London-based head of T. Rowe Price’s ex-US operations said the “big onslaught” from passive funds managers meant the longonly firm needed to deliver in the current challenging markets. “We have to demonstrate that we add alpha. We have to justify our fee. We talk about our big, global research network and these people have to deliver the alpha,” Alderson said. He listed exchange-traded funds (ETFs) providers – which had “taken quite a lot of share in this industry” – as another threat, and said T. Rowe Price was not willing to use its research team to manage the instruments actively because they would be forced to disclose their positions after each trading day under current regulation.
