Economic and social changes are encouraging – or forcing – super funds to become more like umbrellas for their members. Australians trust some super funds far more than their banks, and baby boomers want their employers to help them prepare for retirement by providing financial education. Super funds are rated highest for quality of advice, closely followed by financial advisers, according to Sweeney Research for the Industry Funds Forum and the Australian Institute of Superannuation Trustees (AIST), while banks come in at a poor ninth and the general media last in 12th place.
CalPERS’ open search for new way of asset allocation
A CalPERS investment committee workshop in May, which reviewed its capital market assumptions, marked a turning point in the big Californian fund’s approach to asset allocation. The fund has embarked on a year-long asset allocation review that is more like a total engine rebuild, and arguably one of the most important activities the fund’s investment staff, in conjunction with its board, have undertaken. Not only is the fund reviewing its allocations, but also the very assumptions that drive investments, with the potential outcome not just a tweaking of allocation bands but an entirely new way of investing in assets. In addition, it’s being done in a fully transparent and open dialogue with the board and the public.
The perils of chasing top performers
Choosing any partner, whether personal or business, can be fraught with complexity, and the process of hiring and firing managers does not escape these selection perils. While most sophisticated investors pay more attention to investment process than performance, the latter still acts at least as a filter for most shortlists. A recent paper by funds manager Enhanced Investment Technologies (INTECH), Chasing performance is a dangerous game, explores how insidious chasing performance can be.
Aussie institutions catch up on ETFs
This magazine doesn’t normally find itself defining things, the assumption being that we have a sophisticated audience which has at least a passing familiarity with most investment concepts. However, exchangetraded funds (ETFs) seem to be so far off the radar of the average chief investment officer, a little explanation can’t hurt (with a nod to Russell consultants Nick Curtin and Raewyn Williams, whose April 2010 paper ‘ETFs: An Australian perspective on a global phenomenon’ is a comprehensive review of the ETF ecosystem).
What makes a great investor?
Look beyond the numbers. Investing is about people: the ability to gather good information, analyse assets and create investment strategies all depends on people. And some people are better than others. Very few, however, are so wildly talented that their stories define success in the industry. “My list of iconic investors reaches 10,” says Hugh Dougherty, head of manager research with Towers Watson in Australia. “They have some kind of Midas touch. They’re out there. They’re freaks.” The dismal science produces a Happy Economist
Behavioural aspects to investing are much more widely discussed in professional circles these days than just a few years ago thanks to the growing number of economists and writers who study the less rational actions of market participation. Human biases impact on investment decisions and they are no longer considered soft issues by market researchers. Herding and market bubbles, for instance, and their link with funds manager momentum strategies exist because of consistently irrational behaviour. Alpha is not everything (but it comes close)
Even Cliff Asness believes in it. The boss of quantitative hedge fund AQR Capital Management, who studied under Eugene Fama at the University of Chicago, says he is still “respectfully scared” of the legend of efficient markets thinking when he asserts that alpha exists. “It does. But it’s rarer than people seem to think.” Why managers’ fees trump alignment
For asset owners, there is nothing ideal about the fee deals they strike with funds managers. If there were, fee agreements between managers and investors would exhibit a clear alignment of interests across the dimensions of investment and business risk, time horizon, client service and retention and, critically, a fee which reflects the real value that managers add to portfolio outcomes, says Michael Block, general manager – investments at FuturePlus.
How quants can rebuild their image
Quantitative investing needs to change, and should do so by scaling up to produce more proprietary data, reducing excessive numbers of signals and becoming more “market savvy”, according to the global head of equity research at BlackRock, Ronald Kahn. Mindful of the terrible press that quants received when most practitioners recorded substantial negative returns in August 2007, Kahn now seeks to differentiate ‘scientific investing’ from ‘quantitative investing’.
When smiling children hide ESG horrors
It’s the new ESG-compliance index: the more smiling-children photos there are, the more problems will lurk beneath. David Gait, of Colonial First State Global Asset Management (CFSGAM), said when assessing companies’ compliance with environmental, social and governance (ESG) benchmarks, “the greater the number of pictures of smiling children in the sustainability report, the greater the problems lurking beneath”.
‘Global global’ bests ‘Australian global’
The performance of global equity managers which have Australian-domiciled funds has picked up from the terrible period over 2008 and 2009 but remains less rewarding than the experience for US-based investors over a long period. Data from Mercer Investment Consulting shows that the average active global manager offering $A strategies outperformed the MSCI by 1.3 per cent on rolling three-year numbers between December 1988 and March 2010. This compares with an outperformance of 2.3 per cent for US$ global managers on the same basis between December 1990 and March 2010.
Cooper’s costs threaten innovation
The MySuper and Super- Stream proposals from Jeremy Cooper’s review of the superannuation system have been the focus of the industry’s response. But simple and cheap isn’t necessarily good. Cooper, the former deputy chair of the market regulator, ASIC, handed the final version of the Australian Super System Review to the federal government last month. It contained 177 recommendations across 10 broad subjects aimed at improving the regulation, efficiency and integrity of the superannuation system.
