Cardano and Monty Python collaborate on the crisis

Chief executive of Cardano UK, Kerrin Rosenberg, is a Monty Python fan. In the same eccentric vein as the famous satirists he has a healthy disrespect for the status quo and a quirky view of how pension assets should be managed, which for most funds includes a radical change in asset allocation.

In 2010 Cardano, which is a solvency and risk management firm in the UK and The Netherlands, produced a video series with Monty Python explaining the behavioural aspects of risk management.

Now the Cardano gang are back at work with Terry Jones and co. on a documentary that helps explain why the financial crisis occurred.

It’s not often that finance journalism covers the intersection of actuarial-ism and surrealism, but it’s about time.

Chief executive of Cardano in the UK, Kerrin Rosenberg, is considered a pension thought-leader and he believes what makes the firm different is its focus on making sure the savings of the end user doesn’t blow-up. The notion just begs for Monty Python imagery.

“What makes us different is our beliefs regarding finance and in particular the behavioural finance aspects and how people think about risk, we’re trying to help the end user prevent from blowing up,” he says.

To do this requires breaking a cycle which starts with the over-estimation of returns, institutional failure, system failure and eventually the end user losing out.

In practice it means better risk management, and a focus on a more predictable, realistic result that is not reliant on an “over-achieving economy”.

This calls for a radical change in asset allocation and subsequently very little interest rate risk and equities.

Rosenberg, who was an early pioneer of the use of derivatives, unconstrained equities and hedge funds, says asset allocations should include “a lot of other things” apart from equities and interest rate exposures, including hedge funds, private equity, different types of property, pharmaceutical income streams, and lending to mining.

“When you move away from having a strategic asset allocation it removes constraints and you can look at investments on their validity to the portfolio,” he says.


The problem

The UK pension market is facing what Rosenberg calls a £1 trillion legacy problem, with accrued rights embedded in the system as ‘personal rights’.

“The UK fund salary market just involves two bets – long equities and short interest rates, that’s been a lousy thing to do for 30 years. Since Cardano started in the market in 2006, that there has been a £500 billion deterioration in the industry. The system is at a high chance of failure, it can’t meet the pension promise.”

While Cardano describes the November report by the Department for Work and Pensions on defined ambition as a “major step forward to solving the UK pensions problem”, the system is still over-reliant on unrealistic expectations.

“What do we need? £260 billion of employer contributions in the next 13 years and we need equities to outperform bonds by 3 per cent for 60 years. To put that in perspective this is £20 billion a year, which is nearly half of the yearly dividends of the whole stock market. If either of those don’t come out it will fail. The added problem is now is we’re in de-cumulation so it’s very sensitive to what happens in the next 15 years.”

Cardano, which acts as a large in-house pension fund, was set up with the philosophy that the risk management techniques of banks could be brought to pension funds. Part of this approach means not relying on any one economic outcome.

“It’s about very small risks, no one big approach, and accessing different types of strategies to cover your angles and being careful to size all of the risks put on.”

The approach includes having a strong top down view of the world but also analysing many scenarios.

“We have many scenarios because we know we’ll get it wrong. We fund investments that do well in an environment but won’t lose a lot in the opposite market.”

Innovative mandates with managers are also a hallmark, and if a theme or product doesn’t exist, Cardano will work with managers to create it.

The approach includes an “intense” use of derivatives to manage risks, with the firm trading from Rotterdam. The benchmark is the liabilities of the fund.

“We are fully matched unless risks are worth taking,” he says. “The most disciplined act is that every year we buy protection when it’s cheap, it’s a discipline every year.”

The approach is similar to Bridgewater’s high-profile All Weather fund, but Cardano claims to have one third the volatility, thus giving it a stability advantage.

Rosenberg speaks of the results of the firm, with the liability benchmark in mind.

From June 2008 to December 2012, liabilities in the UK market increased by 9 per cent per annum.

“Our funds were up by 11.5 per cent net of fees. The average pension fund in the UK was 2.5 per cent below the 9 per cent. Our risk has been one third of the average pension fund.”

He says their average client will get out of their deficit hole in 10 years if that performance continues.

Further, the firm’s alignment is based on the deficit, with a performance fee paid on the reduction of the liability.

A performance fee on the balance sheet? Now that’s surreal.