It is often said that the trustees and staff of big pension funds see risk differently to the way the members of their funds do. In benign markets this is not a problem. When markets fall, though, it’s a big problem.
In 2008 in Thailand, for instance, members of the Government’s Thai Pension Fund held a demonstration in the streets of Bangkok to protest against the fund’s negative returns – it’s first ever. And at that stage, the fund had an allocation of about 80 per cent to bonds, mostly domestic. Members don’t like negative results, no matter how short-lived. With such an allocation, of course, the Thai fund has outperformed most of its peers for subsequent years.
Didier Giesen, the head of buy-side sales for the big financial software company Misys, says that pension funds throughout the region can vary dramatically in their attitudes to risk and return. Whether or not the members concur in the detail is another story.
Misys, which is owned by private equity group Vista, which is the world’s 7th biggest software company”. It comprises a roll-up of three companies, which are now controlled by private equity. It has a big operation in Asia, which is Giesen’s area, serviced from his base in Singapore. He says he speaks with a lot of funds and managers, including in Australia, which he visits every few weeks.
Perhaps ironically, Didier says that most Thai investors like short-term returns.
“They are very return focused, “ he says. “And this creates issues for risk management. The Singapore funds, on the other hand, much like most Australian funds, are longer term and invest in multiple international assets. They are long-term and risk averse.”
Risk for these funds is assessed in terms of their benchmarks. They want to control any drift away from the pre-set benchmarks, Didier says.
Some, such as AustralianSuper, are more diversified in both markets and asset classes, which is another way of controlling risk.
“I believe technology can help with risk control,” he says, “especially with international assets.”
Misys has put its Sophis software into two of Australia’s largest funds: QSuper and the Queensland government’s multi-manager, QIC.
The MySuper regulations, which take effect in Australia this July, making complying low-cost default funds compulsory (initially for new members and then phased in for all members who do not choose otherwise), which will involve costs which are not immediately obvious, Giesen predicts.
“The Government is trying to offer a clever instrument for everyone, but this will make it difficult for funds to differentiate between themselves and attract investor money,” he says.
“They will need to be creative and they will need flexible tools to do that. It will be interesting to see how the funds battle it out… It’s extremely costly. Standardization is always costly. You run into control issues.”