Investing in the real world

Last month hosted the Fiduciary Investors Symposium on campus at King’s College, Cambridge University. The university, one of the oldest in the world at more than 800 years old, has produced people, ideas and achievements that continue to transform and benefit the world – including the establishment of the fundamentals of physics and the discovery of the structure of DNA.

It was a perfect environment for a conference that has established a reputation for challenging asset owners and managers to think differently, with an overarching mission of transforming institutional investment decision making. For three days we hosted 115 people from 15 countries debating investment strategy, opportunities and best practice, in particular the challenges of thinking and acting long term. With more than $5 trillion of asset owner money in the room, it provides a good guide to the mood of global investors.

Long-horizon investing has been a focus of many large pension funds for many years now, with a focus on the appropriate investment vehicles, risk appetites and supply chains. What, pleasingly, is clearly emerging now is that pension fund design, purpose and behaviours need to change to achieve the desires of long-horizon investing.

The business of managing pension assets should not be about alpha, or really about money management at all. The pension fund industry – and pension funds individually – are tasked with providing members with a retirement income; and as Keith Ambachtsheer says, they are tasked with turning savings into wealth.

This means what they do, and how they act, should have “everything to do with the real world”, according to Jaap van Dam, head of strategy at PGGM.

This became even more evident at the Fiduciary Investors Symposium, as investors seemed less interested in conversations around smart beta, factors and quantitative investing, and more focused on impact investing, stewardship, behavioural biases and governance.

The fundamental notion of a connection with the real world is important in this industry. Whether it’s in deciding investment strategies – with an emerging tilt away from traditional financial tools towards forward-looking, all-encompassing risk tools and less tolerance for smart beta versus a fundamental macroeconomic view – or looking at the societal benefits of long-term investor behaviours, including the environment and public needs such as affordable housing.

The pension industry should not be viewed as part of the money management industry and should not replicate the way it invests in and rewards staff – there is nothing long-term, or societally beneficial, about the behaviours of quantitatively driven hedge funds, for example.

Pension funds need to understand their mission, and work responsibly to be patient and engaged owners of capital.