Recipe for avoiding half-baked dynamic asset allocation

In what is lauded as somewhat of a Laurel and Hardy performance, APG’s Stefan Lundbergh and academic provocateur Jack Gray, demonstrate the disparity between ideology and action in a hypothetical dynamic asset allocation case study. But jokes aside, it highlights the misnomer in the words “best practice”, and the lack of courage in this industry.

Lundbergh and Gray, both members of the International Centre for Pension Management (ICPM) research committee, presented an interactive case study, which included written material and videos, to the ICPM delegation in Washington in October.

At its core, the case study reveals the ideal conditions for dynamic asset allocation to be effective, what it means to have the “right” chief executive in place, and what having the “right” people in place to implement the strategy means.

It also underlines the importance of constructive involvement from the board, and the setting of clear investment beliefs.

More philosophically what the case study teaches is that it is an organisational challenge to implement a strategy that deviates from best practice.

Those same issues dominate in the real world, says Lundbergh, who also heads the innovation centre at APG.

In the case study a new chief executive is chosen for a fund, with experience outside the pension industry, bringing a new perspective and new management methods to the position. While seemingly ideal, the study shows that behavioural biases such as career and peer risk still influence the decision-making process.

Subsequently the study highlights the challenge in selecting a dynamic asset allocation taking into account that constraints the organisation faces. An important conclusion of the case was that if you don’t get the necessary conditions right, it is probably better to stick to the best practice.

“If [you] want to do it at ‘best practice’ then pick someone known to that.

“To have a jump in an organisation, you need an outsider.

The CEO in the hypothetical came from the oil industry, had no real knowledge of portfolio management but had experience in real investing for the long term.

Gray says that if the industry “hired people like this we could change the world, strongly, and for the better”.

“There is a deep conservatism in the industry,” he says.

Lundbergh says hiring executives from other industries would mean different skills and different thinking.

“They might ask obvious questions that people in the industry don’t ask,” Lundbergh says.

“Big shifts in technology companies have experienced that.”

In the industry there are few examples of true leadership, Lundbergh says, nominating as standouts Claude Lamoureux, Ontario Teachers’ Pension Plan inaugural chief executive; and Lars Rhode, chief executive at ATP since 1998.

The case illustrates that even if the best conditions for the organisation to be successful are in place, it is not an easy task to implement dynamic asset allocation and it is not clear that this is the right thing to do.

Lundbergh says his personal preference would be to have a non-executive board that sets the broad goals, and then leaves the management to implement strategy and achieve those goals.

“I would test the management team strategy was fit to reach the goal, but not take ownership of the strategy,” he says.

Lundbergh says that in addition to learning from other industries, institutional investors can also learn from hedge funds, the insurance companies, and “Grandpa” or old-school investing, such as Warren Buffet’s style.

“There is a lot to be learnt from the hedge fund industry in risk management, particularly in terms of total return and total risk, for example how do they manage risk in a global macro fund?” he says.

He says that because many boards are lay boards, they are subsequently not always well equipped for selecting chief executives and believes the industry could learn more from the corporate world.

“In the corporate world in Sweden and The Netherlands the biggest shareholders form a nomination committee, then use head hunters to find the non-executive board members,” he says.

“They also consider that if they put in a particular person how it would change the board dynamic.”

The same could be done in our industry, he says.

“If want to make it successful then you need to have a clear mandate on what the organisation has to do,” Lundbergh says.

The strength of discussing these challenges in a hypothetical case is that it helps to question the reality in a sage and fun way. Hopefully this will bring insights and generate ideas on how to improve the real life organisation taking all the practical constraints into account. The truth is that the perfect organisation doesn’t exist.

“The objective with the case study is to facilitate a discussion on the organisational implications of dynamic asset allocation. If you are interested to run the case study in your own organisation please contact Jack Gray,” he says.

The original case study, which was complemented by videos highlighting decision making and consequence, can be accessed here. Gray is writing the epilogue as we speak.


The funding for the case study was provided by ICPM. The views expressed in the article are those of the case study authors and do not necessarily represent the views of, and should not be attributed to their organisations.