Telstra Super’s internal investment team felt uncomfortable when it observed that a low volatility index did not line up with the fear and volatility that geopolitics was generating in global markets, so it asked its managers’ views. The process enabled the fund not only to be more comfortable with the anomaly, but also to find out which managers were prepared to be true partners.

In its weekly internal investment team meetings, the A$18 billion ($13.3 billion) corporate superannuation fund for telecommunications company Telstra had identified that the Chicago Board Options Exchange Volatility Index [VIX] was unusually low, but no one internally could fully explain how this was happening in a world of expensive assets, numerous geopolitical risks and mountains of global debt.

Telstra Super has a 27 per cent asset allocation to international shares in its default option and as the US equity market is the largest in the world, and arguably the most important, it desired to understand how the anomaly could affect its overseas holdings and asked its external fund managers what they thought.

“We saw that the VIX, which is meant to measure the amount of investor fear and uncertainty, was very, very low – lower than almost ever seen,” Telstra Super chief investment officer Graeme Miller says.

Typically, the higher the VIX – sometimes called the fear index – the more fearful and volatile the markets. However, the index is highly influenced by the actual level of short-term volatility in US equity markets. And in the 90-days to May 8, 2017, the S&P 500 had its most tranquil period in 22 years, with the actual, realised volatility for that time period falling to 6.7 per cent. The preceding months also had low levels of volatility, though not quite at record lows.

The historical high for the VIX was 80.26 points on November 20, 2008, at the height of the global financial crisis. On Monday, May 8, this year, the VIX closed at 9.77 points, indicating extreme market confidence – there have been only three days since the VIX’s inception in 1992 that it has been lower.

‘Swimming without bathers’

Telstra Super has embraced a partnership model with its 60 or so external managers, which handle around 70 per cent of the fund’s assets. It needs them to be more than just an arm’s length executor of a mandate. It wants access to the manager’s intellectual property, ideas, research and insights.

Before joining Telstra, Miller was the head of investment consulting for Australia at Willis Towers Watson, so he knows the breadth of insight that managers possess. For the purpose of uncovering the internal team’s perceived concern about volatility, or the lack of it, he approached a dozen fund managers and gave them a week to give their thoughts on the VIX issue. Some engaged with the question much more fully than others.

“It exposed, to some extent, those that were ‘swimming without bathers’ on the whole partnership thing,” Miller says. “It’s one thing to say, ‘We truly want to be a partner, we truly want to engage with you.’ But [only] some of them thought deeply about this, really brought the full weight of the organisation to the problem and came back to us with well-thought through answers.”

Miller won’t disclose the specific managers tapped for insights, but says they were selected from each of the super fund’s asset classes to garner a wide variety of views.

He adds that although there was a broad range of managers there was a surprising level of consistency in the responses.

Three of the key observations were:

  • While overall market volatility was low, intra-sector correlations were unusually high following US President Trump’s election. For example, the value of the US utilities sector had dropped, but the US defence sector had risen in value; this was masked by a low volatility in the overall market.
  • Because volatility was based on the spread between implied and realised volatility, it could be argued that the VIX was a lagging, not a leading, indicator.
  • No manager thought the US was on the precipice of a major market downturn, although there was a sense that there was some complacency about the systemic risks in the market.

Insights breed confidence that gets rewarded

Armed with the insights from the selection of managers, the super fund’s 16-person internal team was more confident about implementing actions in response to the disconnect between the short-term risks reflected in the ‘fear index’ and longer-term risks in global markets.

“The fact that markets, as a whole, do not think we are on the precipice of a major downturn gave us confidence to maintain a full exposure to growth assets over the past few months – and we’ve been rewarded for that,” Miller says. The fund’s allocation to growth asset is about 69 per cent for its balanced fund, across domestic and international equities, property and infrastructure.

He adds that the insights drove home to the internal team the point that the VIX is a blunt tool and was not an especially reliable indicator of investor sentiment or risk.

“This allowed us to more confidently position the portfolio towards a full weight to growth assets, coming from a position where our natural bias would have been to be a bit more cautious.”

The success of the approach has emboldened the Telstra Super investment team to reach out to fund managers for their views on market issues more often. And it’s worked both ways. One of the managers felt empowered to come to the super fund with a new idea.

“It has signalled to our fund managers [that we want insights]. It has given them a much deeper understanding of what we are interested in and what we are worried about,” Miller says.

 

 

What is sustainability? The Thinking Ahead Institute has a couple of working groups considering different aspects of the subject and one thing we have learned so far – Hold the front page! – is that a universally accepted definition of sustainability does not exist.

Each investment professional has their own legitimate take on the subject. For what it’s worth, my take is settling on the notion that sustainability is intrinsically linked to the rate of extraction of resources from a system relative to the rate at which they are replenished.

There are implications for investors here but first, let’s look closer at growth dynamics – meaning the shape of the growth rate over time – and sustainability.

I can think of three different types of growth, but there may be more.

  1. Sigmoidal, or S-curve, growth: growth starts slowly, then accelerates for a while before decelerating to a zero growth rate. This growth dynamic applies to most biological things, and explains why trees do not grow indefinitely into the sky.
  2. Exponential: the growth rate is consistently positive up until the point of collapse. An example would be the growth of a colony of bacteria in a petri dish. There is a technical wrinkle concerning whether the point of collapse occurs in finite time (a problem for us) or in infinite time (in which case, we could ignore it).
  3. Chaos: the classic example is the growth in the rabbit population on an island, with unpredictable booms and crashes.

In all three types, growth stops when resources can’t be extracted from the environment fast enough.

In the case of exponential growth, collapse comes when all available resources have been harvested. [Meaning Earth’s resources, I’d say. I doubt it will ever be economic to mine resources from passing asteroids and, further, I consider a human colony on Mars to represent failure rather than success – just think of the per capita resources required to sustain life there…]

We now need to tie these two ideas of sustainability and growth together. If the rate of replenishment of resources is zero – in other words, if we are gifted a one-off endowment of, say, fossil fuels – then we know we are dealing with exponential growth; eventually the resources will run out.

If the rate of replenishment is positive (and there is an existing stockpile), then we know two things:  the sustainable rate of extraction and that we can exceed that rate for a period, albeit with a future cost.

Humans are wired for growth

Whichever way you configure it, I am led to conclude that, over the very long term, the only sustainable growth rate is 0 per cent a year. However, we seem to be wired for growth. So how do we explain this mismatch? Two different strands of thought occur to me.

The first strand relates to history. For the vast majority of human history, global GDP growth is estimated to have been between 0 per cent a year and 0.05 per cent a year. Then, about 1750, it exploded exponentially. This pattern would fit either the sigmoidal or exponential dynamics reviewed above.

Arguably, the former is the more sustainable option – and it is possible to make the case that we could now be in the deceleration phase.

If global GDP is truly exponential, however, reasoning by analogy would suggest that positive growth could be sustained until the resources run out, at which point it collapses. In this case, we would need to define the time frame over which we were concerned about sustainability. If the collapse is likely to be beyond this, then it is outside our frame of reckoning.

The second strand of thought is inspired by Eric Beinhocker’s The Origin of Wealth.

This book makes the case that wealth is knowledge – so more knowledge equals more wealth. Assuming this to be true, wealth will increase indefinitely if knowledge increases indefinitely.

The indefinite increase of knowledge seems plausible, given that the more discoveries we make the more re-combinations of them can be made, to yield yet further discoveries.

There are two caveats in my mind. Again from history, the lesson from the destruction of Arab centres of learning shows that knowledge (and wealth) can be destroyed, even if that is harder to imagine now that knowledge exists in digital form.

Second, the problem of resource limits still needs to be solved. For knowledge and wealth to increase indefinitely, it seems to me that both have to be free of any resource constraints – and that is hard for me to imagine.

To conclude, I reiterate that I am settling on a belief that, over the very long run, the only sustainable growth rate is 0 per cent a year.

Given my belief in complex adaptive systems, a steady state seems remotely likely. More likely would be a chaotic pattern of positive and negative growth rates.

The lessons for investors

What does this mean in the real world of investing? With the caveat that there is seldom a simple and direct link between abstract thought and portfolio positions, there seem to be meaningful implications for portfolios.

First, equities are call options on growth, whereas bonds look more as though they extract resources at a rate more in line with replenishment – so asset allocation could be revisited. Second, there may be implications for risk management – in particular, being mindful of risk over longer horizons, and possibly having a more dynamic risk budget over time. Third, there are clear implications for security (and sector) selection.

We see the subject of sustainability as continuing to grow in importance – so we will continue to refine our thinking in this area.

Tim Hodgson is head of the Thinking Ahead Institute.

 

Brad Tillberg, chief investment officer of the $8.7 billion Oklahoma Public Employees Retirement System (OPERS) is only the second chief investment officer in the fund’s 45-year history. Perhaps even more remarkable, OPERS’ 13-member investment board, responsible for overseeing strategy and manager selection, has had only two chairs in more than 30 years.

This stability has brought a continuity and consistency to the fund’s leadership. Strategy continues to prioritise traditional investments, with passive strategies in equities and bonds, over private markets and active, skills-based investment.

In the latest rebalancing of the portfolio, assets have been split between US stocks (recently reduced to 40 per cent), international stocks (increased to 28 per cent) and domestic bonds (32 per cent). It’s a no-frills approach that Tillberg says still does exactly what it is meant to do.

The fund’s asset allocation is decided according to three main themes: asset allocation is the key determinant of risk and return of the overall fund; diversify by both asset class and within asset classes; and passive funds are suitable investment strategies.

No need for alternatives or private markets

“I don’t believe we are a conservative fund; we are a traditional fund,” Tillberg says in an interview from the fund’s Oklahoma City headquarters. “Conservative implies there is no risk in the portfolio and we do have risk, because we need this to reach our assumed rate of return. However, we are lucky because we have not been subject to the competing philosophies that come with leadership changes.

“You can have a portfolio that gets you to where you want to go without having to go into alternatives or private markets, and our board is extraordinarily sensitive to fees. We can do what we want to do with a traditional portfolio and the results speak for themselves.”

The fund has returned 9.41 per cent in the fiscal year to date, while the 10-year annualised return is 5.92 per cent as of the end of March 2017. Fees come in at 9-13 basis points, Tillberg says.

OPERS administers two defined benefit plans and two defined contribution plans. The largest defined benefit plan is the system’s namesake, the OPERS fund.

The system uses indexing for its domestic equity mandates (the Russell 1000, and Russell 2000 – the large OPERS fund doesn’t use the Russell 2000), its international equity mandates (MSCI All Country World Index ex-US and MSCI ACWI ex-US Growth), and its fixed-income mandates (US Treasury Inflation-Protected Security Index), with BlackRock now providing the four passive mandates for the OPERS fund.

The fund also has nine pure play long-only active managers in US small-cap equity and fixed income, plus three “in-the-hand” index managers, where Tillberg keeps a close eye on tracking errors.

“We emphasise beta exposure and diversification,” he explains. “We de-emphasise active management at the fund level, but we maintain selectivity in areas where we do employ active management. It’s a philosophy that allows us to control the things we can control.”

About 42 per cent of the US equity exposure, 68 per cent of the international equity allocation and 11 per cent of the fixed-income allocation is indexed.

Publicly traded markets mute risk

The manager roster comes to 16, while back in Oklahoma City, Tillberg is a one-man investment team, although he is quick to highlight the importance of the fund’s investment consultant and, of course, the board in decision-making.

“The level of sophistication on our board is strong,” he says. “Our investments are managed with a healthy dose of common sense and that goes a long way. We have the discipline to know what we can and can’t control, understand that the decisions we make have a big impact, and know the importance of maintaining discipline throughout market cycle.”

He also argues that keeping it simple reduces risk.

Like all large institutional investors, OPERS’ risk exposure runs the gamut from interest rate risk to currency and liquidity risk and geopolitical risk. Yet because the fund’s entire exposure is either to publicly traded markets or in vehicles where the underlying investment is publicly traded, risk is also muted.

“This transparency really serves as an additional risk-control function for us and I think this is probably unappreciated in the market,” Tillberg says. “Our portfolio is marked to market every day. By avoiding private markets, we [avoid having to] worry about operational issues like valuation methodologies and concentration in fund holdings, or structural fund risks or key man risk or cash drags or leverage usage. We are geared towards equity beta, no doubt about it, but also hold sizeable fixed income that dampens that volatility.”

OPERS’s success with such a straightforward approach has made Tillberg sceptical of more innovative investment styles.

“Buyers should approach innovative investment products with scepticism,” he argues. “One could have a highly effective portfolio with everything that exists today. One could also get into a lot of trouble with everything that exists today. It is our job as fiduciary investors to understand where a product fits within the portfolio and not just buy the latest product.”

Does he plan to introduce more active strategies, given today’s expensive equity markets and predicted low returns?

“We’re doing just fine at a fraction of the cost,” he concludes.

Since Niklas Ekvall took over at the helm of SEK334 billion ($37.8 billion) Swedish buffer fund AP4 last October, he has immersed himself in finding ways to further develop the fund’s investment processes and portfolio.

Pushing change is challenging when a fund has as celebrated a track record as AP4, where core strengths such as a strong domestic equity allocation, ground-breaking environmental, social and governance (ESG) integration and dynamic internal management already set it apart from peers.

Ekvall believes, however, that current investment strategy could better connect with AP4’s liabilities.

The new chief executive of the fund plans to introduce more long-term strategic investments to broaden its risk strategy. Listed shares account for more than half of assets, and in what he calls a “stronger, top-down grip” he wants to make more of AP4’s unique long-term mandate by adding more long-term diversifying assets.

“We want to extend our investment horizon, adding more diversity and capturing the opportunity we have been given by our mandate,” he says. “It is about furthering our risk taking and diversifying our risk on a strategic level to make sure we capture the potential we have to be long term.”

Under his leadership, the fund will review its approach to alternatives, where it allocates just 2 per cent of assets under management, with a focus on infrastructure, private equity and private debt. However, he does emphasise caution.

“Alternative investments are stressed; we won’t chase investments now,” he says. “It is more about reviewing this for the long term.”

Unique fund structure

Ekvall inherits a fund structure put in place in 2013, whereby investment falls into three horizons: 40 years, three-15 years and up to three years.

The 40-year “normal” portfolio is the reference; it comprises several different indices. Equities, because of their high long-term returns, and more volatile short-term returns, account for 66 per cent of the Normal portfolio, with the rest in bonds.

A third of the fund’s assets are in the “strategic” three- to 15-year portfolio. Here, investment includes real estate, Swedish equities including the small-cap portfolio, fixed income and various sustainability initiatives, such as AP4’s low-carbon strategies.

Tactical three-year management invests primarily in fixed income, along with global and Swedish equities, targeting returns above the index. Swedish equity is one of AP4’s standout portfolios, returning 12.4 per cent in 2016 and 14.1 per cent in 2015. It’s an allocation that has benefited from strong internal expertise over the years.

“We have developed an active stock-picking ability and we are close to companies and the best investment opportunities,” says Ekvall, who adds that the breadth, diversity and efficiency of the Swedish market have helped ensure strong returns. Investment decisions are made on the basis of long-term fundamental company analysis, with corporate governance and sustainability integrated into the strategy.

The aim is to outperform the index by identifying companies with good long-term growth value and revaluation potential.

Similarly, corporate analysis in the Swedish small-cap portfolio is fundamental and manual. There is no ready-made template; analysis is complex and differs from company to company. It requires reading and meeting with representatives of companies, and includes focusing on company structure and governance because of their impact on long-term development.

By law, 30 per cent of fund assets have to be invested in highly liquid and highly rated bonds.

“It gives the portfolio diversity and stability,” Ekvall says. “But it is also challenging in the current market.”

Recent strategies have included broadening the allocations to corporate and mortgage bonds, which give a slightly higher rate of interest than government bonds.

Another recent tactic has been increasing the proportion of short-term bonds to slightly reduce the risk of the fund losing capital when interest rates increase to more normal levels.

Ekvall is also considering how to increase allocations towards yielding assets, like emerging-market debt and high-yield debt. These assets sit outside the 30 per cent restriction on the fixed-income portfolio.

“We are in the process of reviewing our allocation to emerging-market debt,” he says. “One of the challenges is managing the foreign exchange risk, which is cumbersome and costly.”

AP4’s currency exposure – the proportion of assets in foreign currencies not neutralised by hedges – amounted to 27 per cent of assets at the end of last year.

Greater ESG integration

AP4 has just been awarded a ‘AAA’ rating in the Asset Owners Disclosure Project (AODP) Global Climate 500 Index, coming eighth out of 500 institutional investors. Under Ekvall’s watch, the fund will continue to extend its sustainability reach even further. It is now looking into how to integrate a number of themes into its investment strategy, including water scarcity and resource efficiency.

Reviewing how to increase the amount of global equity in low-carbon strategies from today’s 24 per cent of the allocation, is another priority.

“We want to increase our low-carbon strategies and are currently developing ways to put more pressure on, and incentivise, companies to de-carbonise further,” Ekvall says, adding that the fund is also going to increase efforts to make sure all investment decisions take enough consideration of the risk/return impact of climate change.

Generally, investors are classified into one of two categories. Those who use external management to invest their money are considered allocators. Whereas, those who use internal personnel to invest directly into securities or other assets are labeled investors.

This article will explore that concept a little differently. It will focus only on those that use external managers. It will classify as allocators only those who do not spend the time necessary in their due diligence on the manager to address alignment of interests related to fees and legal terms.

Those who make this a part of due diligence will be acknowledged as investors.

A critical part of due diligence

Is aligning interests important enough to spend a significant amount of time on it in due diligence? The answer is an unequivocal yes!

All too often, the limited partner assumes that the general partner will act in its best interest and fails to conduct a thorough look at the legal documents or the fee structure.

Every limited partner wants to pay less in fees, but some don’t consider the fee structure an important vehicle for directing the behaviour of the general partner. Those same allocators also don’t realise that the general partner wants maximum flexibility in the use of the limited partner’s money, with as little risk as possible.

With attorneys being paid handsomely today, they feel an obligation to get the most for their client. The general partner’s attorneys’ typical strategy is to put everything into a legal document (for example, a lasting power of attorney) that favours their client and let the opposing counsel, representing investors, sift through the excruciating detail to find what needs to be eliminated or discussed.

The value of scrutinising fee arrangements

Let’s look at some examples as they relate to fees and legal terms that can have an impact upon the outcome of the performance of a fund. Note that these examples represent just a handful of the many factors to be considered when performing due diligence; this article is not designed to be comprehensive.

There is growing discussion around fees in the industry, not just around disclosure but calculation as well. This is increasing in importance as fees become a much larger percentage of returns in a lower-return environment. Choosing an appropriate structure is essential.

The 1 per cent/30 per cent model is one of many alternative fee arrangements being seriously studied and is designed to help the limited partner receive a much fairer net return in a low-return environment.

If there are high returns, a 1 per cent/30 per cent calculation provides the manager additional revenue above a traditional 2 per cent/20 per cent model when it becomes more affordable to the limited partner.

There are also flat-fee arrangements with managers, which assure the investor that the management fee won’t increase at market rates of return, while also assuring the manager of a certain dollar amount to cover its business costs if returns are negative.

Further, many investors are negotiating hurdles in this low-return environment. Also, fees should be paid for alpha and not beta. That requires a well-structured benchmark so fees are paid only on the excess return over the benchmark. In such arrangements, investors must also consider what to do if the manager doesn’t meet the return expectations.

Obviously, high-water marks have been around for a long time and were designed to keep the limited partner from paying excessive fees on poor performance over the years. But what about compounding the benchmark as it relates to carry to better match the compounding of the investor’s liabilities? Limited partners who are just allocators probably don’t think about the importance of matching the compounding for both assets and liabilities.

Remember, managers are charging high fees with promises of great returns to the limited partner. Shouldn’t there be an understanding of the needs of the limited partner to meet its liabilities (such as accruing pension liabilities and payouts)?

Make no assumptions about legal terms

Limited partners should take a second look at their negotiation of legal terms with the general partner as well. There are many examples of legal terms to which limited partners that want to be investors must pay attention.

One chief investment officer of a municipal plan was shocked to find out that the settlement payment for a US Securities and Exchange Commission violation by the manager of one of the plan’s funds was charged to the manager’s fund.

The municipal plan’s attorneys had properly negotiated that the expenses for the litigation the manager incurred could not be charged to the fund in the indemnification provision of the agreement, but had failed to consider the judgement or settlement costs.

Another extremely important legal issue is that of fiduciary duty.

The concepts of duty of care and duty of loyalty are both bundled into the fiduciary context. These duties assure good behaviour on the part of the manager. However, clever attorneys representing general partners have been eliminating the statutory fiduciary duty protections for limited partners and replacing them with contractual provisions that favour the manager.

Without those protections, the limited partner has limited recourse of action.

All too often, allocators ignore the importance of fiduciary language, thinking the manager is naturally a fiduciary by law. The fiduciary duty language is only one example of the need to perform legal due diligence.

In summary, a good investor must be knowledgeable of the fee structure and legal terms in the fund documents. A good investor realises that the ultimate decision rests with the business partners and not the attorneys.

By working with experienced attorneys, however, an investor can become aware of the pitfalls for limited partners in the fund documents.

Good investors will press the general partner for fair treatment, not fearing harming the relationship. They understand the importance of their fiduciary responsibility and expect the same from the manager.

Bruce Cundick is the chief investment officer of the Utah Retirement Systems.

 James C. Davis is chief investment officer of OPTrust, one of Canada’s largest pension funds. It has assets of C$19 billion ($13.8 billion) and investment professionals located in Toronto, London and Sydney. Davis joined the fund in September 2015. He leads the organisation’s investment strategy and oversees its diversified portfolio, which spans the globe with public market, private market, infrastructure and real-estate assets in North America, Europe, developed Asia and emerging markets. He discusses the fund’s member-driven investment philosophy and how it is transforming OPTrust from an asset-management organisation into a pension-management organisation.

 

conexust1f.flywheelstaging.com: OPTrust has defined itself as a pension management organisation focused on risk allocation and not chasing returns. What has prompted this philosophy? 

James C. Davis: Pension certainty is what matters most to our members. This means earning a sufficient return to pay pensions today and long into the future, and not jeopardising the stability of contribution rates or benefits.

Investment returns are important, but for OPTrust, the plan’s funded status is the most important measure of success. A fully funded plan ensures we are well positioned to meet our pension promise of security in retirement for our 90,000 members. Our member-driven investment (MDI) philosophy is centred around managing risk – returns are the outcome. We strive to take risk purposefully and efficiently, and to be rewarded appropriately for the risk we take, in order to earn the returns required to keep the plan sustainable for the long term. It is this careful balance of risk and return that will enable us to remain fully funded and deliver pension certainty for our members.

 

Can you expand on OPTrust’s member-driven investment strategy?

For any investor, a clear understanding of your objective is critical for every decision you make. At OPTrust, keeping our plan in balance – through stability and sustainability – and remaining fully funded is our singular focus. Our MDI perspective gives us a strong understanding of our liability risk profile and the returns required over a long-time horizon to meet our obligations.

MDI is more than liability-driven investing – it goes beyond mitigating the interest rate sensitivity of our liabilities. Our plan is mature and maturing; we cannot bear the same level of risk as we did 10 or 20 years ago. MDI focuses on allocating risk in the most efficient way, considering all the constraints we face, including those related to plan maturity.

MDI is transforming OPTrust from an asset-management organisation into a pension management organisation. Our focus on funded status is driving a cultural change, [generating] more alignment across asset classes and a total fund focus. Portfolio construction is playing a greater role. It’s not just about alpha anymore, it’s about total return and using risk as efficiently as possible.

 

As an industry, pension funds are facing challenging conditions; market volatility has become the new normal and interest rates have remained low for a prolonged period. How can investors thrive and grow with these macroeconomic challenges?

To be successful as an investor, it is important to have an edge. Competition in the markets is becoming more intense and the challenging macro-environment is making it harder to maintain an edge. At OPTrust, we are striving to build a culture that encourages innovation. Through innovation, we will be able to re-define our edge as the world around us changes.

Our size has proven to be a sustainable edge. It allows us to be nimble and to focus on mid-market deals that larger plans would overlook. We embrace complexity when it makes sense to do so. Some deals may have ‘hair’ on them, causing some investors to shy away. We have a deep private markets team that will take on the challenge of more complex deals and will structure these deals with reward-to-risk payoffs that align with our MDI objectives.

Core to OPTrust’s MDI strategy are strategic relationships. We rely on strong partnerships to show us deal flow and to provide insight. Often, when we are trying something new, we will ask our partners to challenge us. Their insight can help us [develop] a new idea into a competitive edge.

 

Canada’s pension funds have led the world with their approach to investing and asset allocation. OPTrust recently announced its plans to bring trading in-house. Why the move?

Internalising our capital market capabilities is a natural evolution for OPTrust, given our success with the fund’s private-markets and real-estate portfolios, which are largely managed internally.

Agility is key to the success of our MDI strategy and in-house trading will allow us to customise and diversify our investment solutions, rather than relying on third-party, off-the-shelf solutions. It goes beyond trade execution to capital efficiency, enhanced liquidity, market intelligence and direct access. Perhaps most importantly – in a challenging environment where returns are expected to be lower than ever before – costs matter. Internalising our capital markets capabilities will reduce costs.

In many ways, the internalisation of OPTrust’s capital markets activities is inextricably linked to our competitive edge of agility and innovation. The demographic profile of our members, the benefits we pay and our liabilities are unique. We believe the best way to manage risk, and keep the plan in balance, is through customisation.

 

The political climate around the globe is changing and we’ve seen a rise in populism. Looking forward, what impact will this have for institutional investors?

The political climate around the globe creates uncertainty. That uncertainty leads to both risks and opportunities. It means understanding the implication of economic policy changes in the US or elsewhere, anticipating how the markets will react and being prepared to take advantage of opportunities. We start from a position of balance, where we know we can weather the inevitable downturns. Beyond [that], agility and remaining liquid are probably the most important measures we can use to thrive in this environment.

Markets are quick and often overestimate and react in different ways; we have witnessed this with Brexit and the US election. Being prepared, with the right strategy in place to adjust portfolio risks based on policy changes or how the markets are priced, will continue to be core to our success.

 

It’s been said that technological change is disrupting economies and companies. What does innovation mean for investors and why is it so important?

The investment decision-making process will have to change to keep pace with innovation. Today, it’s not just that company A has a new product or idea that may be disruptive to an industry. Rather, it’s how our industry responds to technological change. Big data and artificial intelligence are being used to eke out an edge in investing. As such, we need to be mindful and understand how others may be exploiting and enriching their portfolios with new technology.

Innovation is not new. The steam engine, railway, telephone, commercial aviation – these were all innovative and disruptive at one point. More recently, during the dotcom era in the 1990s, it was hard to predict the winners. Instead, it was easier to target which industries were at risk and what investments to avoid. Being mindful of the potential losers and not just the companies with the newest innovations can go a long way towards improving investment performance.