Institutional investors are damaging their long-tern performance through the “bad habit” of chasing multi-year returns in asset classes and managers, research has shown.A study sponsored by Rotman International Centre for Pension Management and conducted by academics at Columbia Business School, Universite de Lausanne and AQR Capital Management finds anecdotal and statistical evidence that pension fund asset allocations mirror past performance in asset classes at the expense of returns.While pension funds rebalance asset allocations to target weights, the study – ‘Asset Allocation and Bad Habits’ – says evidence shows allocations drift relative to past asset class performance.The study’s authors concede this could reflect buy-and-hold strategies, or a market-cap weighted approach. However, the study focuses on return chasing, pointing out that financial markets often carry momentum over a number of months, which makes chasing “ideal”.“Pension funds in the aggregate do not recognise the shift from momentum to reversal tendencies in asset returns beyond a one-year horizon,” the paper argues.The study shows that funds tend to chase returns over several years.Using data from CEM Benchmarking, an organisation that collates and benchmarks pension fund performance, the study analyses more than 570 US-based pension funds with approximately $10bn (€7.3bn) in assets on average.It looks at returns and average weighted allocations from 1987 to 2011, using a three-year return horizon and its effect on future allocations.It finds that weighted allocations, in general, are related to current returns, as well as returns for the previous three years, in each of the main asset classes.Breaking down the asset classes produces weaker, and sometimes negative, correlations, such as in international equity and fixed income.However, the evidence does indicate asset class policy is positively correlated with past returns of three years, with some evidence showing this is more the case in corporate pension funds than in public.“Institutional investors are anecdotally known to chase returns – buy into recent and longer-term winners – whether asset classes or managers,” the report says.“And many lack patience when facing a few years of underperformance, even if they are aware of the limited predictive ability in past performance and the high transition costs.”Using equities and fixed income in a relatively basic example, the study demonstrates return-chasing beyond one year will have a negative impact by the end of three years.“Ill-timed flows into and out of good investments can make the investor’s performance poor,” the study says.“By contrasting evidence of multi-year, pro-cyclical institutional allocations, with findings of multi-year return reversals in many financial assets, we hope to make at least some investors remedy their bad habits.”
“The Austrian pension system lacks diversification,” he said. “A good mixture of the various pillars is much needed.”As the first-pillar reforms of 2001-03 go into effect, Austria’s replacement rate is expected to drop gradually to around 60% from the current 80%, but Krischanitz stressed that forecasts were “very difficult” to make.But he pointed out that the current participation rate of 40% in the second pillar – in which he includes both funded solutions and unfunded, on-book reserves – was clearly too low to bridge this pensions gap.Krischanitz said the instruments available to provide occupational pensions were generally too complex, and that there were too many small products and providers.He said this had “scared off” many employers, adding that employees were currently under no pressure from politicians to set up pension plans.Krischanitz said he was convinced this demand would begin to materialise from 2025, when people start seeing reduced first-pillar payouts, and that there is “no money in the companies either”.He called on politicians to create tax incentives for companies to set up pension plans – or even to consider legislating a mandatory system. The demographic situation in Austria’s first-pillar pension system will be “dramatic” by the year 2025 and worsen even further over the following decade, according to Christoph Krischanitz, managing director at actuarial consultancy arithmetica.Only after 2035 will the ratio of active workers and those who have to be cared for – children, the unemployed, the sick and the elderly – level out and stabilise, he said.Krischanitz argued that, because the second and third pillars are so “weak” in Austria, the problems plaguing the first pillar will hurt the whole of the country’s pension system. He even went so far as to claim that the concentration of demographic risk was so acute as to be considered “negligence”.
The Ständerat, the Swiss Parliament’s smaller chamber, did make a number of amendments, but it approved the overall plan in mid-October 2015.But on the weekend after the approval, general elections were held in Switzerland, leading to a slight shift to the right with the conservative SVP and the FDP gaining a joint majority in the larger chamber of Parliament, the Nationalrat.In the winter session of Parliament in December, the new MPs will take their seats, while the members of the parliamentary commission on social security and health questions (SGK) will also have to be re-elected.Although it is remains unclear how Parliament’s new make-up will affect the details of the AV2020, the Nationalrat is widely expected to make changes.One change expected by many industry experts is a hike in the retirement age, which the centre-left party SP has opposed to date.A recent survey among the 200 newly elected or re-elected MPs showed a majority supporting an increase in the retirement age above the age of 67.According to the survey by the Basler Zeitung, “more than 80%” of conservative MPs would vote in favour of a retirement age at 67.The Nationalrat is also expected to change the first-pillar pension hike introduced to the reform package by the Ständerat.The parliamentary representatives had agreed to grant everybody receiving a pension from the first pillar a monthly increase of CHF70 (€57) to compensate for cuts to pensions from the second pillar once the reform took effect.This measure, however, has come under fire.Jérome Cosandey, researcher at Swiss think-tank Avenir Suisse, said the measure was like using a “hose to water daisies”.For more on the long-running AV2020 saga, see the December issue of IPE magazine Swiss news daily Neue Zürcher Zeitung (NZZ) has joined a chorus of voices calling for the complete re-negotiation of the Altersvorsorge 2020 pension reform package.In an article published, yesterday, the newspaper said there were arguments in favour of “re-opening the mammoth template”.A re-negotiation, it said, would reduce the risk of “being left empty-handed in the end – as was the case in recent years after several attempts”.Interior minister Alain Berset presented the AV2020 reform package, which calls for changes to the second and first-pillar pension systems, a year ago.
Neuberger Berman, Invesco, Momentum Investment Solutions & Consulting, Mercer Investments, Eastspring Investment, AXA Investment Managers Real Assets, SSN Group, MSCI, Morgan Stanley, PwC, KPMG, ResponsAbility InvestmentsNeuberger Berman – Christian Puschmann has been appointed head of client group for Germany and Austria, with a particular focus on the institutional client base in the region. The move follows the recent addition of Javier Nunez de Villavicencio to lead business activities in Spain and Portugal, as well as the appointment of Jonathan Geoghegan to the UK Financial Institutions and Intermediaries client group. Puschmann joins from Invesco in Frankfurt, where he was deputy head of institutional sales. He has also served as chairman of the Investment Consultants Working Group and vice-chairman of the Pension Business Committee at the German Asset Management Association (BVI).Momentum Investment Solutions & Consulting – The consulting arm of Momentum UK has made three hires. Reena Thakkar, Marc Devereux and Raj Goswami, all formerly principal consultants at Mercer Investments, will join Richard Cooper later this year to help grow the investment consulting business in the UK. All three hires will be responsible for providing advice to institutional investors across the full investment consulting spectrum.Eastspring Investments – The Asian investment arm of Prudential has made four additions to its equity team. Bonnie Chan has been appointed as a portfolio manager for the Asian Infrastructure Fund, joining from Jefferies, where she was a senior analyst for transportation and infrastructure. Mandeep Sachdeva has been appointed as a manager in the Global Emerging Markets (Asia) focus team, joining from Fidelity in London. Arthur Kadish has been appointed as a portfolio manager in the equity team, joining from Primrose Capital Management, where he was an Asian equity analyst, while Shea Pei Shee has been appointed as a portfolio manager, joining from Leedon Capital Group, she was an investment director. AXA Investment Managers Real Assets – Christian Heyn has been appointed head of development for Germany and Austria. He joins from SSN Group, a Swiss commercial property developer, where he was managing director. Prior to that, he worked for DIL, a Deutsche Bank subsidiary, as managing director, and before that for Viterra Development, a former E.ON subsidiary, as local head of development in the North-Rhine-Westphalia state.MSCI – Alvise Munari has been appointed managing director and head of client coverage for the EMEA region. He joins from Morgan Stanley, where he was global head of equity derivatives sales and financial engineering.PwC – Leo Ring and Hannah Carter have been appointed to the pensions and investment consulting team. Ring joins PwC as a director from KPMG’s pensions actuarial team, having started his career at Towers Watson, while Hannah Carter joins from Aon Hewitt.ResponsAbility Investments – The Swiss asset manager has appointed Rochus Mommartz, a long-standing member of the management board, as chief executive. He is to succeed company co-founder Klaus Tischhauser, who plans to step down at the end of this year. Mommartz first joined ResponsAbility in 2003.
Pension providers in Sweden should consider stress testing their portfolios for the risks posed by climate change and stranded assets, the country’s regulator has said.Although ruling out further regulation in the immediate future, Finansinspektionen’s report to the government said it saw an advantage in financial institutions’ considering such risks when conducting scenario analyses and other stress tests. It argued that such assessments could provide a rapid assessment of the risks that could impact financial stability, and how they could best be addressed – while initially looking at more qualitative, rather than quantitative, scenarios, such as how the changing climate might impact companies’ business models.The suggestion comes shortly after the European Systemic Risk Board said it might include carbon risk in future stress-test scenarios proposed to the European supervisory authorities, including the European Insurance and Occupational Pensions Authority’s next stress test for the pensions sector, due in 2017. Additionally, the regulator said any scenario stress testing would require consistent, comparable and reliable carbon data disclosure – either nationally or internationally, and referenced the work currently being undertaken by the Financial Stability Board’s taskforce on climate-related financial disclosures.The report, based on work undertaken by the UK’s Grantham Research Institute, nevertheless concluded that the Swedish pensions sector was less exposed to climate risks that other EU markets.Its sample of Swedish pension investors – AMF, Alecta and the four main AP funds – reported a lower exposure to high-carbon assets than similar pension investors in other EU countries, such as the UK and the Netherlands.Finansinspektionen concluded that, overall, the Swedish financial sector was less exposed to climate risks than other markets.The regulator’s call for a uniform carbon-reporting framework comes after the government in November threatened to legislate for a framework, if the commercial pensions sector failed to come to its own agreement on disclosure and reporting.The threat came shortly after the AP funds announced details of a new, uniform carbon-reporting framework for all six of the funds.,WebsitesWe are not responsible for the content of external sitesLink to Finansinspektionen report on climate change and financial stability
The International Monetary Fund (IMF) and the European Commission have revised downward their expectations for economic growth given the Leave vote in the UK’s EU referendum last month.The IMF said the global outlook for economic growth had worsened as a result of the outcome of the referendum, despite better-than-expected performance earlier this year.Maurice Obstfeld, chief economist and economic counsellor at the IMF, said “Brexit has thrown a spanner in the works”. The IMF now expects global growth of 3.1% and 3.4% for 2016 and 2017, respectively, down 0.1 percentage point from its baseline global growth forecasts for 2016 and 2017 in April. This masks geographical differences, however, with the outlook worse for advanced economies, in particular the UK, and broadly unchanged for emerging market and developing economies.The IMF downgraded its expectations for growth mainly to reflect the macroeconomic consequences of “a sizeable increase in uncertainty”, including in the political realm.“This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally,” it said.“The initial financial market reaction was severe but generally orderly.”It noted that, as of mid-July, sterling was around 10% weaker despite recovering somewhat, equity prices were lower in some sectors, especially European banks, and that yields on safe-haven assets had fallen.Economic growth in the UK will fall by 0.2 percentage points for 2016 and close to 1 percentage point next year, according to the IMF, as increased uncertainty is “projected to significantly weaken domestic demand relative to previous forecasts”.The IMF qualified its update to its world economic outlook by noting that, “[w]ith ‘Brexit’ still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting”.Maurice Obstfeld, IMF chief economist: “Brexit has thrown a spanner in the works” Its new baseline forecasts are based on the assumption of a gradual reduction in uncertainty, Brexit negotiations between the EU and the UK avoiding a large increase in economic barriers, no major financial market disruption, and limited political fallout from the referendum.But more negative outcomes are “a distinct possibility,” according to the IMF.Obstfeld said: “The real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty. This overlay of extra uncertainty, in turn, may open the door to an amplified response of financial markets to negative shocks.”‘Extraordinarily uncertain situation’The European Commission, meanwhile, also expects that the uncertainty resulting from the UK vote will curtail economic growth, for the UK and for the EU.“The referendum has created an extraordinarily uncertain situation,” it said.“Due to the lack of information about the new equilibrium after the UK’s exit, many elements have not yet entered the assessment but nevertheless constitute substantial risks to the outlook.”It said that, before the EU referendum in the UK, GDP growth in the euro area would have been expected to reach 1.7% in 2016 and 2017.It recently revised this outlook to reflect expectations of slower private consumption and investment, and impacts on foreign trade.Based on the results of scenario analyses, the Commission now expects euro-zone growth of 1.5-1.6% in 2016, and 1.3-1.5% in 2017.This, noted the Commission, implies a loss of GDP of 0.25% to 0.5% by 2017.This compares with expectations of a 1-2.75% drop in economic growth in the UK by then, according to the Commission.Given the extent of unknowns about the situation after the UK exits the EU, it said, “the adjustment path is impossible to specify”.“This implies the uncertainty shock could evolve quite differently in terms of dimension and duration,” it said.Its revised outlook concerns the near-term impact of the referendum.
The UK Pensions Regulator should exercise its powers “to take a proportionate and flexible approach” to scheme funding, the UK workplace pensions association said in the wake of the Bank of England’s easing action plan, which sent defined benefit (DB) deficits to fresh record highs.The central bank today cut interest rates for the first time in more than seven years, to 0.25%, and launched further quantitative easing.This includes purchasing up to £10bn (€11.9) of UK corporate bonds over the next 18 months and re-starting purchases of Gilts, of £60bn over the next six months.It also announced a new funding scheme for banks, the “Term Funding Scheme”. The rate cut had been fully priced in but not the asset purchases.The Bank of England’s announcement sent Gilt yields tumbling to fresh record lows, and UK DB pension scheme deficits soaring to record highs.According to consultancy Hymans Robertson, DB liabilities increased by £70bn to £2.4trn in the wake of the Bank of England revealing its action plan, with the pension schemes’ aggregate deficit standing at £945bn.Sterling fell, while equity markets have risen.The UK’s Pensions and Lifetime Savings Association (PLSA) said the rate cut and further quantitative easing would put pension schemes under greater pressure. Commenting on the rate cut, Graham Vidler, director of external affairs at the PLSA, said the association recognised the need to protect the UK economy but that “strong consideration needs to be given to the negative impact this will have on the 6,000 private defined benefit pension schemes helping some 11m savers”.He acknowledged that some of the Bank of England’s quantitative easing programme targeted corporate bonds, but he said the impact on Gilt yields would still be an additional burden for many pension schemes.The Pensions Regulator (TPR) needs to adapt its approach accordingly, according to the PLSA.“Given the current economic conditions, we are calling on the Pensions Regulator to use its existing powers to take a proportionate and flexible approach to scheme funding in these uncertain times,” said Vidler.“It should give particular consideration to schemes going through a valuation cycle at the moment.”Others also pointed to the negative effect on pension schemes’ funding, with implications for scheme sponsors in addition to the regulator. Meanwhile, according to Toby Nangle, head of multi-asset allocation for the EMEA at Columbia Threadneedle Investments, some members of the Bank of England’s Monetary Policy Committee (MPC) had indicated that “they would be keeping in mind the impact of any move by the Bank of England on pensions, insurance and banks”.He said that while the Term Funding Scheme appears to be designed to mitigate the impact of the rate cut on commercial banks, the fact that the MPC “assessed the impact on pension funds of further yield declines as being relatively limited looks courageous”.He added: “Their assessment that the overall size of contributions to defined benefit pension schemes have been stable over 20 years despite fluctuations in the size of their deficits deserves further scrutiny.”
If Dutch pension funds don’t conquer their fear of change and become more customer-friendly, they run the risk of becoming the “dinosaurs of the future”, according to Gerard van Olphen, CEO of the €470bn asset manager and pensions provider APG.Speaking at the annual conference of IPE’s sister publication Pensioen Pro yesterday in Amsterdam, Van Olphen said his biggest worry was the “sector’s inability to change”.In his opinion, pension funds must adopt the service level of, for example, Dutch national airline KLM or German online retailer Zalando.“Participants as well as employers must be treated like genuine customers as people are used to nowadays,” he said, adding that “mandatory saving for an occupational pension also comes with an obligation for the sector”. Gerard van Olphen, APGThe CEO referred explicitly to helping participants find information and making choices. “Currently, we only provide very limited support,” he said.“While participants are seeking assistance for making an informed choice, providers aren’t allowed to give any advice at the moment,” he added.An additional problem, Van Olphen said, was that members “don’t know their pension fund and don’t trust the sector”.APG was assessing the potential of big data and artificial intelligence for its processes, he explained, and was trying to deploy big data for predicting which questions web-surfing participants are to ask.“By being ahead of the question, for example through a pop up answer, we could increase our service and lower our costs,” he said.Van Olphen also made clear that APG had ceased an experiment aimed at picking up trends from social media traffic.“We have concluded that the potential benefits don’t outweigh the costs,” he said. Van Olphen argued that the sector had a long way to go: it was still awarding communication prizes, for example, which he said was customary in other sectors five or 10 years ago.
The three funds already have a collective vehicle for infrastructure investments, known as GLIL.Writing in Merseyside’s 2017-18 annual report, chair of the pensions committee Paul Doughty said the administering authorities of the three pension funds in the Northern Pool were “close to formalising governance arrangements”.The joint committee providing oversight of the pool had been operating in shadow form.Separately, Merseyside hinted that it was considering implementing a downside protection strategy following improvements in its funding level.Doughty said valuations indicated funding levels of around 100% and that “ways to ‘lock in’ some of the gains achieved are being assessed”.Several UK public pension funds have recently adopted equity protection strategies to secure gains made in the public equity markets while limiting their exposure to any downturn, without having to change allocations to the asset class.Merseyside said alternatives, driven by strong performance in private equity and infrastructure assets, contributed significantly to its investments outperforming the fund’s benchmark in the financial year to the end of March.The LGPS fund’s investments gained 3.7% in 2017-18, compared to 2.7% for its benchmark.Merseyside steps up carbon reduction workMeanwhile, the pension fund also said it was reviewing its investment beliefs and strategic framework, including its asset allocation policy, to ensure these “appropriately” integrate climate risk considerations.Merseyside’s pension committee had mandated that the fund’s investment strategy be brought into line with the goals of the 2015 Paris Agreement.It said its current focus on climate risk management had been on the mitigation of transition risk – the risk of carbon-based assets losing value as a result of regulatory or other action to curb global warming.Merseyside said a carbon footprint analysis of the fund’s listed equities showed it had significant concentrations of climate risk within the UK and North American segments of its equity portfolio.The pension fund had set itself the target of switching one-third of its passive equities into a low-carbon index-tracking strategy. The goals would be to mitigate transition risk in UK and North American passive equities by reducing emissions intensity by around one-third, and reducing exposure to fossil fuel reserves by around half.The pension fund would also seek to introduce a tilt towards companies benefitting from “the burgeoning low-carbon economy”.It would continue to invest in the low-carbon economy through the unlisted, illiquid segment of its strategic benchmark, mainly via its 7% allocation to infrastructure.The pension fund expected to have more than £250m invested in renewable energy by 2020. The members of the UK’s largest public sector pension asset pool have established a collective private equity investment vehicle, according to one of the funds.The Northern Private Equity Pool (NPEP) will make commitments of around £720m (€805m) in 2018 and 2019, according to the £8.6bn Merseyside Pension Fund.Merseyside, Greater Manchester Pension Fund and West Yorkshire Pension Fund have formed the Northern Pool in line with the UK government’s policy for the Local Government Pension Scheme (LGPS).NPEP, a limited partnership, was incorporated on 22 May. Merseyside said it would probably contribute around £160m to the private equity fund.
“To remain successful in a low-carbon world, companies must act today, aligning their capital decision with the goals of the Paris Agreement, and setting stretching targets,” she said.“We are seeing many of Exxon’s peers step up, and reaffirm their sustainability ambitions even amid the current testing circumstances. The world, and Exxon’s investors, cannot afford the company to fall behind.”Earlier this year LGIM announced a tougher stance on CEO and board chair positions being combined, as a result of which it would vote against combined roles in director elections globally.LGIM will also be supporting a shareholder proposal for an independent chair and a shareholder resolution for increased transparency on political lobbying.Last month Church Commissioners for England and New York State Common Retirement Fund wrote an open letter to ExxonMobil shareholders asking them to call for change at the company with their votes.The Church Commissioners tried again to get a climate change-related shareholder resolution onto the ExxonMobil AGM agenda, but it was, also again, blocked by the Securities and Exchange Commission.ExxonMobil’s AGM will be held on 27 May.Fossil fuel financingPre-declaring voting intentions has already featured this AGM season in relation to a company’s positioning with regard to climate change.Brunel Pension Partnership and Merseyside Pension Fund, two important UK local authority investors, did so in the case of Barclays, which faced two climate changed-related resolutions at its AGM last week.One of them was a shareholder resolution co-filed by Brunel and Merseyside among others. Calling on the bank to set and disclose targets to phase out the provision of financial services to fossil fuel companies, it got 24% of the vote.The other proposal came from the bank itself following shareholder pressure. Passed with 99.9% of the vote, it commits the bank to a strategy, with targets, for aligning its financing portfolio with the goals of the Paris agreement and comprises a pledge to be emissions neutral by 2050.Brunel and Merseyside had pre-declared their intention to support both resolutions in a bid to get other asset owners to do the same.“We hoped to see both resolutions pass, but are pleased to see that votes for the shareholder resolution (23.95%) exceeded the 20% threshold that requires the bank to consult with shareholders and explain the views received and actions taken publicly within six months,” said Faith Ward, chief responsible investment officer at Brunel after the AGM.To read the digital edition of IPE’s latest magazine click here. Concerns about ExxonMobil’s approach to climate change have contributed to driving the UK’s largest asset manager to pre-declare its intention to vote against the re-election of the chair of the oil and gas major’s board of directors, who is also the chief executive officer.Pre-declaring its voting intention was an “unusual step” for it to take, Legal & General Investment Management (LGIM) said in a statement.It said Exxon had shown “persistent refusal” to disclose its full carbon footprint and set company-wide emission targets, while a growing number of its peers and countries were embracing the concept of needing to achieve net-zero emissions by 2050.Meryam Omi, head of sustainability and responsible investment strategy at LGIM, said the asset manager remained concerned by Exxon’s “lack of strategic ambition around climate change”.