Improving risk management practices and allocation of capital according to risk drivers rank among the most important challenges for institutional investors to overcome in the next 10 years, according to Towers Watson.A list of the top eight challenges (see below) to be overcome to position institutional investors for success over the next 10 years was debated at the consultant’s Ideas Exchange conference.
Global head of investment content, Roger Urwin, says all eight of the challenges are interlinked on the investment road map that investors face.
“Strategic asset allocation is not a model that works particularly well and we need to work towards its replacement.”
He likens dynamic strategic asset allocation as “crocodile investing”: being very patient and then snapping into action.
He says governance is systematically challenged and needed to be upgraded, and risk management processes needed to be running more smoothly.
“Too many investors are trying to get quick answers to something that is very nuanced: risk is a multi-faceted concept.
Urwin says investors should broaden their view of sustainability.
“There is too much turnover, products with high fees for the value proposition, chasing momentum and peer group comparison: they are all not sustainable,” he says.
For Carl Hess, global practice director of investment, the sovereign debt issue needed to be considered by institutional investors.
“We’re not in Kansas anymore,” Hess says. “These debt levels are not sustainable, and there are various paths to overcome that. Investors need to look at which paths may affect their portfolios.”
Naomi Denning, head of Asia Pacific, says in that region the issues of dynamic versus strategic asset allocation, and the role of emerging markets were challenges that dominated funds’ thinking.
The top eight challenges:
- Improving risk management practices
- Allocating capital according to risk drivers
- Striking an appropriate balance between a long-term strategic asset allocation and the ability to respond dynamically to a rapidly evolving investment environment
- Dealing with the possible/probable fall-out from the huge increase in developed market sovereign debt
- Making a meaningful allocation to alternative assets without introducing excess complexity and blowing the MER budget
- Reflecting the increased importance of emerging markets in investment portfolios
- Developing appropriate investment solutions for members’ post retirement
- Integrating sustainability factors into funds’ investment programs