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.
The ‘other’ Cooper’s review: MySuper embeds bad investing
The Cooper Review’s MySuper proposal dangerously entrenches the outdated notion of a fixed strategic asset allocation, Schroder Investment Management CEO Greg Cooper has warned. Cooper last month welcomed Bill Shorten’s appointment as Minister for Superannuation and Financial Services, saying he’d bring a fresh eye to the industry informed by his experience as an AustralianSuper trustee. That said, Cooper said Labor faced four challenges in its handling of superannuation. First, the super guarantee had to be increased more rapidly than the present timetable; second, SuperStream must be implemented to eliminate inefficiencies; and third, super funds had to be encouraged to stop comparing themselves with their peers.
In hard times, a new approach for hedge fund-of-funds
Painfully aware that some Australian institutional investors have “drawn a line” through hedge fund-of-fund investments, a subsidiary of FRM is taking a different approach that generates not only returns from underlying managers, but also a share of their corporate revenue streams as well. FRM Capital Advisors (FCA) launched its Catalyst Fund in late 2007, and so far has US$350 million under management, which it has invested in six managers ranging from Victory Park Capital, an asset-backed lender, to Varna Capital Management, the equity long/short fund run by Svetlana Lee, who brought her analyst team with her from Citadel. Rather than merely make an investment, however, the Catalyst model “recognises the value in the due diligence process we have gone through to make that investment itself ”, according to Clive Peggram, the deputy CEO of FRM and boss of the FCA subsidiary.
No rush to internal management from Sunsuper
Even as Sunsuper added to its internal investment resources last month, chief investment officer David Hartley expressed reservations about extending his team’s direct investment responsibilities much further. The addition of an actuariallytrained risk and strategy analyst, Andrew Fisher from Milliman, has taken Hartley’s team to well over 20, if one counts personnel like a Brisbane-based investment lawyer. Industry funds of a similar size to Sunsuper, like UniSuper and AustralianSuper, have begun to ramp up internal management of some asset classes.
Meet Investec’s new sales chief
Investec Asset Management has recruited its new head of sales and marketing from Tyndall’s institutional business development team.
Frontier stays true to 'core' values
As Frontier Investment Consulting progresses through its Australian equities review season, its preference for the ‘core’ portfolio has become more entrenched – and that’s not good news for low tracking error active managers of domestic shares.
Roundtable: long lifecycles don't suit static SAAs
The financial crisis exposed a major flaw in superannuation: the inability of accumulation-focused funds to protect members on the cusp of retirement or in the early decumulation phase – when large investment losses can be catastrophic. But lifecycle investment strategies are evolving that provide funds with the tools to meet the needs of this burgeoning member segment, as discussed in a recent roundtable convened by Investment Magazine and Milliman.
