With only a few days before the US election Amanda White speaks with Stephen Kotkin, the John P Birkelund Professor in History and International Affairs at Princeton University, about what it would take to actually make America great again.

Kotkin, an expert in international affairs and diplomacy, looks at the impact of the election results over the short and long term, examining the eroding of trust in institutions and the role of government in society; the moral societal degradation and the undermining of social solidarity; and America’s position in the world and the ongoing conflict with China.

About Stephen Kotkin
Stephen Kotkin is the John P Birkelund Professor in History and International Affairs at Princeton University.
He is the co-director of the program in history and the practice of diplomacy and the director of the Princeton Institute for International and Regional Studies. He established the Princeton department’s Global History initiative and workshop, and teaches the graduate seminar on global history since the 1950s.
He also holds a joint appointment in the Woodrow Wilson School for Public and International Affairs at Princeton and is a research scholar at the Hoover Institution at Stanford University.
He has authored many books including his latest Stalin: Waiting for Hitler.

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts.  She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

What is the Fiduciary Investors series?
The COVID-19 global health and economic crisis has highlighted the need for leadership and capital to be urgently targeted towards the vulnerabilities in the global economy.
Through conversations with academics and asset owners, the Fiduciary Investors Podcast Series is a forward looking examination of the changing dynamics in the global economy, what a sustainable recovery looks like and how investors are positioning their portfolios.

The much-loved events, the Fiduciary Investors Symposiums, act as an advocate for fiduciary capitalism and the power of asset owners to change the nature of the investment industry, including addressing principal/agent and fee problems, stabilising financial markets, and directing capital for the betterment of society and the environment. Like the event series, the podcast series, tackles the challenges long-term investors face in an environment of disruption,  and asks investors to think differently about how they make decisions and allocate capital.

A surprising request recently landed on the desk of the Deans at some of the Netherland’s main universities. A letter from Rotterdam-based asset manager Robeco asking to collaborate on shaping the curriculum for students studying finance.

Universities are still plugging neo-classical economics based on linear growth and consumption, but today’s students need to learn new models that steer away from teaching the importance of maximising profits to value ecological and social capital, says the asset manager’s head of sustainability integration Masja Zandbergen, also a member of Erasmus’ University’s Platform for Sustainable Value Creation.

“We need finance students to study broader topics like sustainability, philosophy and ethics,” she enthuses.

It’s an issue close to the PRI’s heart too. The UN organisation made up of asset owners and managers is also urging its membership to shift away from what CEO Fiona Reynolds calls “outdated economic theory” that prioritises shareholder value.

It increasingly wants its investor cohort to prioritise capital to companies that work for all their stakeholders, particularly employees, some of whom the pandemic has proved have few rights and scant access to healthcare.

The need for investors to view their portfolios through this new lens is just one of many factors required for a sustainable recovery. Just as important is the need for the investment industry to adopt a more proactive role in lobbing for policy change.

The US Department of Labor’s recent pledge to reform pension fund rules, making it harder for asset managers to embrace ESG principles under its definition of fiduciary duty, shows the dangers of sitting on the side lines.

For Reynolds, the policy threatens ESG product innovation, and risks taking the market backwards. It acts as a rallying call to investors to use their clout against industry bodies lobbying in their own interests, she says.

“Investors have levers to pull and need to use them. Corporate lobbies are winning the day over the rest of us; we need to play a bigger role in engagement with policy makers.”

In Europe, where policy makers are taking a leap in the right direction with the EU’s green taxonomy, Zandbergen observes investors increasingly engage with governments, but notes it wasn’t always the case.

“In a transition, governance will always lag,” she says. One of the challenges is that engagement on policy requires investors collaborate and allocate leaders. “We need more people to take the lead,” she says.

Leadership and collaboration could bring pressure to bear on polices like a carbon price – and scrapping fossil fuel subsides. If cash-strapped governments ended fossil fuel subsidies (which the IMF valued a $5 trillion in 2019) and introduced an effective carbon price, it would accelerate a sustainable recovery. Asset owner enagement with policy makers could also counter worrying signs that governments are locking in high carbon pathways in the recovery and not titling enough of their support packages to green endeavour.

“We either lock in high carbon pathways, or use [the stimulus] to accelerate the net zero carbon economy. I am not convinced we are going in the right direction,” says Reynolds.

Investing in line with the SDGs is another key to a sustainable recovery. It also requires investors embrace impact alongside risk and return. In a bid to encourage its signatory base to allocate more capital to impact, the PRI has launched a report detailing five steps to the process.

“This is a 2030 agenda, and we haven’t got much time left,” she says, referring to the 2030 timeline attatched to the SDGs. Impact requires understanding that without social and environmental asset being preserved, there will be no economic growth, says Zandbergen. “The investment industry is moving beyond just creating economic wealth.”

Elsewhere, she believes asset managers should do more of their own research. At the moment, many investors still source their ESG data from external providers. Only when they ditch outsourcing and invest in their own research processes, will they truly integrate sustainability.

Elsewhere she urges investors to nurture diversity and, above all, trust that investing to solve climate change and inequality and protect biodiversity will bring good economic outcomes.

“There are three long-term trends to address and they aren’t different to pre-COVID. We need to have faith that solving these things will lead to good economic outcomes,” she concludes.

The coronavirus disease (COVID-19) pandemic has caused dramatic loss of life and major damage to the European economy, but thanks to an exceptionally strong policy response, more devastating outcomes have been avoided. European real GDP is now projected to contract by 7 per cent in 2020, its biggest decline since World War II, followed by a rebound of 4.7 per cent in 2021. But the recovery’s strength will depend crucially on the course of the pandemic, people’s behaviour, and the degree of continued economic policy support.

Click here for the International Monetary Fund’s October 2020 European regional economic outlook.

Whatever it takes: Europe’s response to COVID-19

COVID-19 has exacerbated retirement insecurity and governments need to use this as an opportunity to examine their system inadequacies and make improvements according to David Knox, partner at Mercer and author of the annual Mercer CFA Institute Global Pension index.

The index measures adequacy, sustainability and integrity of 39 retirement systems around the world using more than 50 indicators, and the most recent study shows that the COVID-19 pandemic has had a profound impact on the provision of adequate and sustainable retirement incomes over the long term.

According to Knox the impact of COVID-19 is much broader health implications and there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future which means the ability to provide adequate and sustainable retirement incomes over the longer term has also changed.

“The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt in most countries. Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” Knox said.  “It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.”

In addition some governments around the world have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve consumers’ liquidity positions. But according to Professor Deep Kapur, director of the Monash Centre for Financial Studies these developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, and influence the evolution of the Global Pension Index in the coming years.

Australia for example enabled individuals whose income had dropped by more than 20 per cent to access up to A$20,000 from their pension assets; India allowed partial withdrawals for COVID-19 treatment and a payment from the pension fund account not exceeding three months’ wages and allowances; in Peru workers were permitted to withdraw up to 25 per cent of their savings from their individual accounts, with a limit of 12,900 soles ($3,685); while Chile allowed active contributors to voluntarily withdraw 10 per cent of their individual pension funds up to $5,600. In other countries including Indonesia, Thailand, Colombia and Peru the level of contributions were reduced, but Mercer predicts the short-term halting of contributions will have less impact on long-term retirement savings than the withdrawal of accrued benefits.

Whether pension assets should be used in extreme circumstances for something other than retirement income is an issue of debate. The OECD says: “Access to retirement savings should remain an exceptional measure based on individual specific circumstances and based on regulations already in place for that purpose”.

“It is interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, have not permitted early access to pension assets, even though the assets of each pension system are more than 150 per cent of the country’s GDP,” Knox said.

The Netherlands had the highest index value (82.6) and has retained its top position in the overall rankings. Thailand had the lowest index value (40.8).

 

Top five ranked pension systems

Overall score
Netherlands 82.6
Denmark 81.4
Israel 74.7
Australia 74.2
Finland 72.9

 

Two of the world’s largest pension funds, the $626 billion Dutch APG and the $660 billion National Pension Service of South Korea (NPS), have joined forces in a partnership to invest in private assets including infrastructure and private real estate.

The funds have already this year jointly invested in Portgual’s largest toll road operator, Brisa, and Scape which is a market leader in student accommodation in Australia.

Chief investment officer of NPS Investment Management, Joon Ahn, says to effectively respond to the fast-paced global investment environment, NPS has looked for ways to diversify its deal sourcing channel and reinforce competitiveness in securing investment opportunities in quality real assets.

“As a part of these efforts, NPS wants to cooperate with like-minded long-term institutional partners at a global level. The partnership with APG is a next step to realise this vision,” he says. “We believe that partnering with leading global institutional investors will widen our access to more attractive assets in the market and help generate better returns.”

The goal of the partnership is to gain access to attractive investments worldwide, at better conditions and with more influence and governance rights

Ronald Wuijster, member of APG Group’s executive board, responsible for asset management says the partnership allows access to deals that would be difficult to do alone.

“As a global pension investor, we believe that partnering with institutional, liked minded-investors, can deliver attractive long-term responsible investment returns to our pension fund clients and their beneficiaries. With this partnership, clients of both APG and NPS gain access to attractive investment opportunities which would be difficult and more expensive to realise if acting alone. At the same time, we see benefits in exchanging knowledge in this partnership on real assets investment. On both themes, APG is a globally recognized leader, and we believe that sharing our knowledge is beneficial for this partnership and society as a whole. Within a relatively short time, we have been able to establish a genuine, long term and mutually beneficial partnership with NPS. We look forward to realizing more successful investment projects with NPS as well as with other like-minded investors in the years to come.”

Both investors are open to investing with other like-minded investors, and Ahn says that NPS will continue to look for partnerships with other large pension funds and SWFs going forward.

NPS, which is the third largest pension fund in the world, has an allocation of 3.5 per cent to infrastructure and 4.2 per cent to private equity.

APG also has other strategic agreements in place including a development joint venture with CPP Investments to invest in and develop industrial warehouse logistics in South Korea.

 

Albourne Partners, a leading consultant focused on alternative investments, has been an advocate for fee innovation in the investment industry for many years, focusing on the shape of fees, and fee discovery and transparency.

A recent review by the firm that examined the manager performance and mandate activity post fee changes, showed that managers are being rewarded for fee innovation.

John Claisse, the firm’s chief executive said there was also a relationship between manager performance and willingness to be flexible on fees.

“We looked at managers that had a collective 189 different fee changes made over the last two years, and our research showed that from the point where those changes were made 70 per cent had a positive trailing three-year return, so it was not necessarily managers that were already underperforming,” he said in a Fiduciary Investors Series podcast. “In addition managers were rewarded with positive capital flows where there were loyalty discounts or aggregate discounts across a consultant or size of allocation.”

Albourne has been looking at the shape of fees since 2012 for its clients – which include Teacher Retirement System of Texas, BT Pension Scheme and Regents of the University of California – that collectively invest more than $550 billion in alternatives.

This started with an investigation into what they called “the angry dollar” where investors were paying for performance but analysis showed it was coming from beta. At that time it launched the Feemometer which encourages more open dialogue about fees and how to get better fee arrangements.

Perhaps most notoriously Albourne worked with Texas Teachers which implemented a 1 or 30 approach to alternative manager fees. This structure means the client pays a 1 per cent management fee or a performance fee of 30 per cent of alpha, whichever is greater. However, following periods when the 1 per cent management fee exceeds 30 per cent of alpha, an investor pays less to bring its share of alpha back to 70 per cent. Essentially, when alpha is not sufficient to cover the 1 per cent management fee, that fee is paid as an advance on future performance fees, and Claisse says the structure has revolutionalised the conversation around fees.

“It was designed at the time to focus on the shape of fees, to make sure investors were thinking about participation in the profits, alpha generation of a manager, and making sure they’re paying for skill,” Claisse says.

The consultant also launched Into the Matrix initiative in 2016 which among other things scored managers on their fee transparency and flexibility. It also allowed managers to post open and closed proposals to investors on specific fee deals as part of a match making service between asset owners and managers.

“We spent a lot of time thinking about the shape and discovery of fees rather than the level, and wanted to give investors a better understanding of the options available,” he says. “We are gathering data from 750 funds with over $600 billion in assets, who are answering surveys about what types of fee structures they’d be willing to look at and be flexible with. From that comes a score on flexibility and transparency. There is a tradeoff with a manager who is being inflexible but very transparent about that. We want to know when a manager is flexible but not transparent, that is not best practice.”

Once the data is collected, it is possible to look across the universe at equivalent funds and what they are charging, and what it would be like if an investor was working with a different manager.
Albourne, which takes a fixed fee for its services, has been advocating for better practice within the alternatives industry for many years and in addition to issues of fee discovery and transparency has also recently been advocating for new initiatives around diversity and inclusion and how alternative investment managers can incorporate ESG.

“It is clearly a challenge for the investment industry and so many parts of society to address some significant systemic inequities and how that is translated into different industries.”

Albourne, in conjunction with AIMA, launched a due diligence questionnaire that focuses on diversity and inclusion and builds on the work the consultant has been doing to identify women and minority-owned firms.

“With ILPA’s blessing we worked with AIMA to expand the reach of their questionnaire to gather data around workforce diversity as well as ownership, and insights into family friendly leave policies and staff conduct information,” he says, adding that LGBTQ+, veteran status, disabilities and minorities are all considered topics.

“This builds on what we’ve been doing elsewhere in ODD for several years around equal pay, and the D&I policies and practices of managers. Now we are encouraging managers to share this data – I’m really hopeful this will have a material impact on how managers approach D&I within their businesses,” he says. “We’ve had phenomenal feedback about the questionnaire and already more than 400 funds that have submitted the questionnaire.”

He says both managers and investors are responding well to the increased focus on diversity and inclusion.

“The feedback from investors is they have been struggling with how to gather the data, so having a standardised template for them is helpful. On the manager side our preliminary feedback has been positive, it is helpful in triggering their own work internally and new policies in response to thinking through the questions and enhance their own D&I.”

Claisse says in the current environment investors are looking for more consistent returns and there has been an emphasis on relative value or global macro managers that are a greater diversifier, and to be consistent in returns.

According to the firm’s alpha profiling tool, most strategies were performing well before the crisis, then experienced significant losses but have recouped those negative alpha experiences since, with structured credit the outlier.

“If you look at alpha generation more recently, say year to date, stock picking outside of the US has been the strongest, then global macro and fixed income arbitrage,” Claisse says. “Hedge funds don’t have a divine right to exist. A lot of underlying strategies are cyclical, so they need to pay attention to the environment and adapt.”

Most managers have managed the working from home environment effectively from an operational perspective and in some cases investors are actually getting more transparency, he says.

“You lose something by not being on site, but the investor access to the risk takers and information is actually improved. It’s a strength of the industry that managers adapted their processes.”