Money Managers Virtual Round Table

But, equally significant, sponsors of defined contribution (DC) plans face perhaps their greatest communications and member education challenge. Members are looking for information on whether their investments have been caught up in the credit crunch and assurance that positive action is being taken.

Plans now understand that the search for yield is not without risk. Far from being a panacea, hedge funds and certain alternative investments can, and do, carry considerable tail risk. Funds need to consider their role in the ongoing crisis, assess changes in their investment policies and review procedures.

On an industry perspective, the credit crisis has already initiated a consolidation in the financial services sector. We expect to see it continue, with considerable implications for the investment management business.

Benoît Durocher: The crisis is a reminder that market risks remain the largest risk factors for most pension plans. The trend toward getting a better understanding of the various risk factors affecting pension plans through asset/liability management and liability driven investing solutions will continue. But in most situations, perfect liability-matching is not a viable option, and plan sponsors will continue to seek higher investment returns through asset classes that are deemed more risky.

Although investment risk can be measured and managed, it will not be eliminated. One must remember that investing pension assets is a long-term process. Seeking short-term opportunities in this unstable environment is a high-risk venture.

Damon Williams: Market conditions as we are currently experiencing are frightening for many clients. The importance of a money management partner that can help them understand recent market events, provide them with calm, well-considered investment advice and help them avoid making knee-jerk portfolio changes has never been higher.

Increased consolidation of money managers in the hands of global financial institutions is a result of the mergers and takeovers this crisis has forced. In addition, financial institutions in general have become more interested in money management as a business line in today’s capital-constrained environment, due to its very low capital requirements.

This consolidation and concentration of money managers in the hands of global financial institutions will likely mean an acceleration of a trend already in place in Canada: the bifurcation of the market into large multi-product firms offering a wide range of global capabilities—many of whom will come from outside of the country—and niche players increasingly focused on one or two narrow areas of specialty.

We will also see, in the DB environment, more strategies focused on risk identification and control—particularly, relative to liabilities. With low government interest rates and equity markets having plummeted, conditions for pension plan solvency will be awful this year. As a result, many pension plan sponsors will be taking a very hard look at the asset/liability mismatch risks present in their portfolios and asking whether they are appropriate.

Any moves toward risk reduction will need to be tempered by the need to avoid knee-jerk, fear-driven asset mix changes at precisely the wrong time, but the need for a manager who understands and can walk clients through liability-driven investing strategies will become greater than ever.

Peter Lindley: The impact on institutional money managers has been significant. The current credit crisis has underscored the necessity for them to do their own credit research and not to rely solely on rating agencies. Larger firms typically conduct their own credit research and focus more on independent risk and compliance functions—key areas that will receive greater attention going forward.

The current market environment also casts doubt on the traditional asset mix approach (60% equity/40% bond allocations) that is so pervasive. While it is true that many hedge funds have failed or have significantly underperformed this year, on the other hand hedge fund indices such as CSFB Treemont, have out-performed stock indices, this year and over the last 10 years.

I expect that one outcome will be a revisiting of best practice. We will also see greater interest in market neutral or absolute return strategies, with a major caveat among investors being a requirement to invest in liquid assets if the strategies require leverage. Liability driven investment solutions will continue to generate investor demand as, once again, we are experiencing falling interest rates and declining stock prices.