Fay Coroneos: In addition to the fact we’re all retiring at the same time, our health system has improved, so everybody is living longer too. So the payouts are going to be much longer and that’s going to have an impact going forward.
Wendy Brodkin: I think the first thing that has to change is governance. Where everyone is stuck these days is at hiring and firing managers and monitoring managers’ performance, rather than saying, “What is my objective and how do I build a constructive portfolio around that objective?”
Mark Doyle: An additional driver would certainly be the low interestrate environment I think we’re going to see over the next ten years or so. Expectations are going to change, and I think we’ll see a shift to alternative investments outside of traditional stocks and bonds.
George Klar: For a good part of our pension history, we’ve had a disconnect between the asset side of the business and the liability side of the business and partly we’re living on borrowed time. The issue really comes down to how we manage the pension plan to ultimately deliver the promise allowing the people to retire securely and with dignity.
Rajiv Silgardo: The asset management industry is going to have to create products to help pension plan sponsors better manage their funding situations, their liabilities. What I’m talking about are products that better correlate with the needs of these plan sponsors.
Solutions for addressing the asset-liability mismatch
Paul Halpern: In moving to liability investing we’re going to see greater use of fixed income. We should also observe longer-term equity mandates so as to reduce the impact of short term investing. However, this result will occur only if trustees are prepared to accept these longer mandates.
Silgardo: You don’t have to be 100% liability matched, but you do need to build portfolios that are better correlated with your liabilities. We advocate gradually changing the nature of the fixed-income portfolios and moving towards long bonds and real return bonds and overlaying that strategy with portable alpha. That portable alpha can come from fixed income. It can come from a diversified set of strategies.
Carl Bang: The solution is really looking at each individual plan in terms of their specific challenges. As you start to marry the asset and liabilities side together, it’s a completely different opportunity set you’re looking for.
JJ Woolverton: Trying to match assets and liabilities is very costly. What we haven’t had in the past is plan sponsors understanding the variance between the assets and liabilities. They understand the risks they’re taking now. They’re in a lot better shape.
Greg Malone: In a lot of organizations you have two different groups or two different committees looking at the assets and liabilities. So if they can’t marry that within their own organization it’s difficult for a consultant to try to get them to that point.
The pension asset management industry in 2016
Coroneos: The returns won’t be as healthy as they’ve been, so I think expectations will shift away from getting double-digit returns. And I think every asset manager will have to have a lot of transparency, which will require new technology. Although a lot have already moved to having risk management tools, I think it’s going to become part of our day-to-day environment.
Klar: To a certain extent, as we become more aware of the difference between alpha and beta, you will probably see a lot more strategies of alpha transport— taking the alpha from where you don’t want it to where you do. And I would imagine that right now some of that is limited in some plans by the fact they don’t allow derivative usage, such as swaps. But I think this will change dramatically over the next 10 years.
How money manager performance will be measured
John Lockbaum: There are still two components to evaluating performance. You’ve got your objectives specific to your plan and to the payment of the obligations, but you also have to measure the skill of the investment manager. You’re looking at it from two different angles, one to ensure you are satisfying your funding objectives and two you’ve got the right managers who can demonstrate some skill.
Woolverton: We are doing a significant disservice to the plan sponsor community in Canada by not having appropriate benchmarks for measurement in equities, in fixed income or the Canadian market. We have a significantly concentrated market, and without an appropriate benchmark we are forcing money managers to have a fully concentrated portfolio. We have to develop the appropriate guidelines to benchmark, to measure the money managers effectively.
Malone: We’re probably not going to get away from benchmark comparisons and relative universe comparisons because that’s what excites people. That’s what they are interested in hearing and seeing—comparing their performance to something else. My feeling is that in five to 10 years we’re still going to be talking about relative performance.
Doyle: There’s the whole issue of accountability for results that I think has been lacking in the industry in general terms. The beauty-contest approach to performance measurement needs to change. It’s difficult because a lot of people make their livelihoods based on that model.
Brodkin: It comes down to the fact that people can’t differentiate. They’ve got four managers in a room who are very similar in performance so they are going to take the one with the highest performance because they can’t differentiate. Or they are going to pick the one with the brown shoes because they can’t differentiate.
Doyle: It’s really the short-time thinking that’s the problem here. The people who are in charge of the plans—the sponsors, the staff and also the trustees—are all there for a very short time and nobody wants to see disasters on their watch. So there is a risk aversion to acting in the long-term interest of the plan. And to me that’s a huge governance issue.
Klar: Right now, a lot of the people on pension committees, and it’s not just limited to multi-employer plans, are not experts in finance. Even in plans with sophisticated committees, you’ll find that there are just a few people who are the driving force. Both human nature and impatience are key forces that influence shortterm decision-making. It’s not ideal.
Bertram: It used to be what we call around our office ‘the Alice-in-Wonderland effect.’ If you don’t know where you are going it doesn’t matter which road you take.
Warren Stoddart: There is an enormous inertia in the industry because of the asymmetrical risk profile faced by most of the people making the decisions on behalf of these plans. There is limited downside to be seen to be going along with the majority of others. There’s an element of safety in numbers. And there’s potentially a significant personal liability with making a bad decision on behalf of the plan.
Where fees are headed
Harry Marmer: I think the crucial page that traditional money management has not pulled out is to change the business from an asset-gathering business to one where the fees are more aligned with result. Clearly that better aligns the system with what the client wants and what the money manager wants. We’re going to see more of that because eventually the hedge fund area is going to change it all.
Bertram: When you look at fees, it breaks down into that you are paying somebody for the return on the risk they take. And that’s why you see a lot of difference between hedge funds and long stock managers. Buried within that long stock management mandate, for example, is the cost of managing the market, which is negligible. Then you are paying for the risk they take relative to that.
Malone: Fees are likely going to go up. But I think the key to it is that you have to be able to determine whether you are getting value for the fees. When we are talking about quality and skill, those are the things that plan sponsors will be willing to pay a premium for.
Long-term impact of the removal of the Foreign Property Rule
Woolverton: The greatest threat to the Canadian money management community is the elimination of the Foreign Property Rule. The one thing the money managers could count on was that 70% of funds were going to come back to Canadian money managers. Now with the elimination, that doesn’t bode well for the Canadian money managers.
Peter Arnold: I’m not sure that a lot of Canadian-based managers are ready for the globalization of equities. On an opportunistic and investment-quality basis, Canadian-based firms are going to have a hard time competing with those firms that have the research that can be converted into results in small-, mid- and large-cap opportunities.
Marmer: Right now the typical fund is sitting at 30% Canadian equity and I’d be surprised over five years from now if we’re seeing more than 10%.
Brodkin: If you look at the experience of other countries that didn’t have a foreign content limit, there’s still a country bias. What might change this going forward is this idea of separating alpha and beta. And in a country like Canada, it’s hard to see where alpha can come from consistently. In the past, it’s come from a big commodity bet or from a small cap bet. And if we’re really in a two-factor market—financial and energy—that’s a pretty big bet you’re making for a manager to generate consistent alpha. There are probably other places in the world where you can get more robust alpha sources.
Stoddart: I don’t know if the volume of assets flowing out of Canadian equities is going to be that great. The $100-million to $3-billion plan is going to continue to exhibit a home country bias most strongly because they probably don’t have the capacity or inclination to manage currency as a separate asset class.
Michelle Savoy: I think overall liability- driven investing is more of a concern for pension plans across Canada than the issue of whether to be underweight or overweight in Canadian equities. They are really looking to meet their liabilities and that’s what’s driving them. If people can produce a risk adjusted investment strategy that closely matches the liabilities, whether it’s foreign, whether it’s domestic, I think that’s what people will gravitate to.
Klar: At the end of the day, the fact that we’ve recently eliminated the foreign property rule means there needs to be a time element between the rules’ demise and elimination the 50-year entrenched mindset of domestic oriented investing.
The types of money managers most likely to succeed
Bertram: Managers that are focusing on domestic assets are going to struggle because they are going to be competing for a smaller and smaller proportion of the pie. I think also that the specialist managers are going to have a tougher time competing in the future because fortunately or unfortunately specialist managers get a whole bunch of constraints put around them and it reduces their ability to produce alpha over any reasonable time. And I think that’s the kind of specialty-type manager you’ll see is somebody who’s an alpha producer but without the constraints of a specialty management function around them.
Doyle: I think you’re going to see many more managers move towards or pop up in the long-short space. The derivatives complex has rapidly expanded over the last couple of years, particularly on the fixed income side—credit derivatives and interest rate swaps. It’s just mushrooming and this allows a lot of opportunity for managers to get into the space.
Stoddart: Managers who are going to be successful are not those who define themselves in terms of specific mandates, but those who understand their capacity to generate alpha and package that alpha in product types that are relevant to the needs of clients.
Marmer: Institutional investors will gravitate towards firms that offer superior investment solutions in conjunction with non-investment alpha services that help clients solve strategic issues.
Coroneos: A successful manager is the one that can figure out how to keep the cost down and not sacrifice the returns in the long term, especially in the hedge fund industry.
Barbara Palk: I think the industry itself is going to evolve. There will be small niche players with portable alpha specialists and some proven skill. The flipside of that is the larger product firms with broad resources who can provide all things to all people. So you’ll either have some specialized firms or very large managers.
Bang: It’s very likely that, in 10 years time, you will see some funds which have most of their risk outside of Canada but most of their assets in Canada.
Arnold: What you do tend to see is that you expand into newer areas for growth. For example, we talked about liability-driven solutions and that’s an area for growth. Enhanced indexing is another area for growth. And then the active management space is going into the world of alternative investment solutions. Canada is a really unique kettle of fish when you think of it on the world spectrum.
Bang: I think an overriding theme you see is that the traditional [model] just doesn’t cut it any more. You need to find efficient ways to get higher returns. You will see much more agnostic benchmark-type managers, you’ll see more long/short and hedge funds become more mainstay. You’ll see a convergence of hedge fund and traditional management.
PARTICIPANTS
Peter Arnold, national practice leader, investement consulting, ACS/Buck Consulting; Carl Bang, president, State Street Global Advisors in Canada; Bob Bertram, executive vice-president, investments, Ontario Teachers’ Pension Plan; Wendy Brodkin, industry authority; Mark Doyle, vice-president, senior client advisor, J.P. Morgan Asset Management; Paul Halpern, professor of finance and the Toronto Stock Exchange Chair in Capital Markets, Rotman School of Management, University of Toronto; Fay Coroneos, director, risk and investment analytics, RBC Dexia; George Klar, vice-president and executive director, institutional sales, MFC Global Investment Management; John Lockbaum, North American fund services, RBC Dexia Investor Services; Greg Malone, actuary and investment consultant, Eckler partners; Harry Marmer, senior vice-president, institutional investment services, Franklin Templeton Institutional; Barbara Palk, president, TD Asset Management; Michelle Savoy, president, Capital Guardian Trust Company; Warren Stoddart, managing partner, Connor, Clark & Lunn Financial Group; Rajiv Silgardo, CEO in Canada, Barclays Global Investors, JJ Woolverton, managing director and COO, Guardian Capital LP. |
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