(Pictured: Amin Rajan)
Pension funds which did well through the market turmoil of the last decade, according to Amin Rajan, the chief executive of CREATE-Research and an Oxford don, had three things in common which meant they did not need to rely on market recovery to bail them out.
They had strong investment beliefs, they had a disciplined approach to buying and selling assets and they had the skills and governance to secure a first-mover advantage, he told the Portfolio Construction Forum.
These funds also avoided: an over-reliance on financial engineering for value; the herd instinct which would have prevented them from buying in the market dips; and a low engagement with asset consultants and managers.
Rajan said that his firm’s research over the past three years showed that implementation was becoming increasingly important with investment strategies – perhaps as important as asset allocation.
He said there was an emerging business model in the pensions landscape recognizing that “governance is the alpha behind alpha”. While asset allocation was important, providing diversification by risk factors, implementation was just as important. This included manager selection, choice of investment vehicles, use of shorting and leverage, risk management, value-for-money fees and use of real-time information.
“We’re not so much managing risk as managing uncertainty,” he said. “Having a dialogue and transparency are the keys to the whole thing.”
The recession was not a normal business-cycle recession. It was a balance-sheet recession, he said. “They can last anywhere from 15 to 50 years and we’re only five years into it… We are re-leveraging in order to assist de-leveraging. That’s very difficult to achieve.”
Rajan said that defined benefit plans in the UK continued to move from static to dynamic asset allocation and from an asset focus to liability matching.
“The reality is that investing has changed so we’ve been obliged to try new approaches. Dynamic investing is the flavour of the decade. Will it work out? Time will tell. There have been some early successes by some Scandinavian plans and some private plans in the US, but probably no more than about 10. These are very unusual times.”