Analysing the most read stories of 2016 reveals some interesting trends. Investors are interested in reading about their peers, as our Investor Profiles feature heavily, as do the interviews we have done with CEOs and CIOs of the world’s largest asset owners.

But overwhelmingly the most popular investment stories have been about fees and issues of sustainability – including ESG integration and portfolio de-carbonisation.

In 2016 we have delivered more than 300 investor profiles, analytical and research-driven pieces on the global institutional investment universe.

Below is another look at the 10 most popular stories of 2016.

Thank you to all our interview subjects, readers and supporters over the past year.

New York’s actions louder than words

Creating a low-carbon index was a practical way for the New York State Common Retirement Fund, the third largest pension fund in the United States with $178 billion in assets, to put its beliefs into action.

Vicki Fuller, chief investment officer of the fund, says that environmental, social and governance (ESG) considerations are integral to the investment philosophy of the fund.

“We live by them, they are firmly mentioned in our investment philosophy as a source of return and risk, this is not new for us,” she says.

“It is not new for us to be invested in renewables, solar, wind, and active managers who execute sustainable strategies.”

Now $2 billion of US equities is passively tracked to this low-emission index, which excludes or reduces investments in companies that are large contributors to carbon emissions, like the coal mining industry; and increases investments in companies that are low emitters. Read more

 

SASB the missing link in ESG integration

No longer can analysts use the excuse there is inadequate data for incorporating ESG into investment decisions.

The Sustainability Accounting Standards Board (SASB), a not-for-profit chaired by Michael Bloomberg with Mary Schapiro as vice chair, was formed to set market standards for disclosure of material sustainability information to investors. With “material” defined as likely to affect financial performance.

The organisation – founded by Jean Rogers and made financially viable through donors including Bloomberg Philanthropies; foundations such as Ford, Rockefeller, PwC and Deloitte – is predicated on a belief that ESG factors can impact company financial performance and drive long-term value. The fact there is a now a broader range of risks and resource constraints beyond just access to capital makes the use of standardised financial reporting to investors insufficient.

This means that a new, standardised language is needed to articulate the material, non-financial risks and opportunities facing companies that affect their long-term value creation. Read more

 

Top1000 PRI edition

To commemorate the 10th anniversary of the Principles for Responsible Investing,
Top1000funds.com released a special print edition magazine and was the official publication for the PRI in Person in Singapore in September. Read more

 

HOOPP fully invested in the future

HOOPP, the C$63.9 billion ($50 billion) multi-employer defined benefit plan, is an extraordinary position of being 122 per cent funded. It continues to focus on innovative investments – such as credit derivatives – as a way to achieve its pension promise.

“We view ourselves as a pension delivery organisation, while a lot of other funds see themselves as asset managers. Asset managers generally measure risk in terms of market volatility or drawdown in capital, but our mantra is to deliver on a pension promise,” says Jim Keohane, president and chief executive of Healthcare of Ontario Pension Plan, HOOPP.

“We define risk as based on factors that may impede our ability to write that cheque 25 years from now, which would include additional factors such as changes in the purchasing power of our assets, caused by changes in interest rates and inflation. We don’t benchmark ourselves against returns, we aren’t this type of organisation. Measuring against returns does not give a full picture of whether or not you have succeeded.”

Success, for Keohane who has been at HOOPP since 1999, is better measured by the glowing funded status at HOOPP, up to 122 per cent from 114 per cent in 2014, despite all of last year’s economic uncertainty.

HOOPP is a C$63.9 billion ($50 billion) Canadian fund is a multi-employer defined benefit plan, serving 309,000 working and retired healthcare workers.

Its liability driven investment, LDI, comprises two investment portfolios: a liability hedge portfolio, designed to hedge the major risks that would impact HOOPP’s pension obligations – namely inflation and interest rates – and holding assets which perform in a manner similar to its liabilities, and a return seeking portfolio designed to earn incremental returns and bring diversification benefits. Read more

 

CalPERS chief navigates perfect storm

Outgoing CalPERS’ chief executive Anne Stausboll talks to Amanda White in an exclusive interview discussing her passionate views on sustainability, simplifying the portfolio, and where the improvements are needed.

When Anne Stausboll started her role as chief executive at CalPERS it was a tumultuous environment, or what she calls a “perfect storm”. It was January 2009, the markets were in crisis, there was a state budget crisis in California, and CalPERS was facing ethical issues relating to the fund and former employees.

“My focus was on restoring trust and credibility to the organisation, and making it transparent and open,” she says.

Where historically the culture at CalPERS had been built around its size, and the large size of its portfolio; Stausboll has been focused on rebranding CalPERS around a public service organisation.

“We are here to serve others who have served California,” she says. “This has brought the organisation together, and it is very unifying to brand around that.”

CalPERS is a big business, and the role of CEO is immense. CalPERS administers retirement benefits for more than 1.8 million California public sector workers and oversees an investment portfolio of approximately $300 billion. CalPERS also purchases health care for nearly 1.4 million members.

And this means Stausboll oversees around 2,700 employees and an annual budget of $1.8 billion.

“When I started my job as chief executive in 2009, CalPERS had been here for 75 odd years,” she says. “One thing that struck me about the organisational structure was we didn’t have a financial office. That was quite a gap.”

She sees it as one of her greatest achievements; that there is now a well-established and well-functioning financial office, that also oversees risk management, and is integrated with the actuarial office and investment office. Read more

 

Pay for performance

Pension fund executive pay varies widely around the globe, with differences based on the extent of internal management and alternatives exposures in the fund. So what is best practice for pension fund executive pay?

In 2014, the Ontario Teachers’ Pension Plan (OTPP), considered by many to be the best pension plan organisation in the world, paid salaries, incentives and benefits to its 1109 employees of C$300.5 million.

As chief executive, Ron Mock, got a base salary of C$498,654 and total direct compensation of C$3.78 million – which included long-term incentive payments of C$1.961 million. Neil Petroff, the executive vice president of investments, got paid C$4.48 million, including C$2.722 million of that in long-term incentives.

These sound like grand figures. And indeed they are. However, what is behind the figures is more interesting than the numbers alone.

The total investment costs of OTPP, including staff salaries was C$460 million. On assets of C$153 billion, that’s about 28 basis points.

Conversely, the $295 billion CalPERS, which is restricted in what it can pay staff due to its public sector identity, paid $159.3 million in salaries and wages in 2014 – around US$60 million less than OTPP. But it spent a massive $1.347 billion in external management in the 2014 financial year. Which means it is paying costs of about 45 basis points on external managers alone. Read more

 

A hedge fund performance reality check

Pension funds need investment strategies with attractive risk and return characteristics to fund their liabilities.

Hedge funds are increasingly popular investments which purport to fill this need, as witnessed by a 25-fold increase in hedge fund use in the CEM global database between 2000 and 2014.

But have hedge fund portfolios delivered these benefits? New CEM research indicates that some did but most did not. Read more

 

AIMCOs evolving hedge fund strategy

Canada’s Alberta Investment Management Corporation, (AIMCo), the C$90.2 billion ($69.4 billion) fund that invests on behalf of 26 pension, endowment and government funds, has more than three quarters of its assets in public markets, most managed internally.

This includes money market and fixed income allocations and a diversified mortgage portfolio, but the most sizeable chunk lies in a $27 billion sophisticated equity portfolio that combines passive low cost strategies with complex hedge fund allocations.

Internally managed equity investments include quantitative and passive strategies which currently invest in 45 countries around the world. Smart beta is one such allocation, and with it AIMCo aims to add 100-150 basis points every year.

“It’s been successful. I like smart beta,” says chief investment officer Dale MacMaster, in an interview from the fund’s Edmonton headquarters.

“We want to access beta as cheaply as possible.” Read more

 

Principles for restructuring fund manager fee

The mechanism for sharing risks via fees in the pension industry is weak, according to Fiona Trafford-Walker. Asset-based fees have little linkage with the manager’s ability, clients don’t generally get enough benefit of scale and there is not usually a penalty for underperformance other than termination of the relationship. So how should asset owners pay their managers? Read more

 

Private equity cost disclosure the solution

Investors should adopt the standardised fee reporting template for private equity released by the Institutional Limited Partners Association, according to Mike Heale and Andrea Dang from CEM Benchmarking. Their research shows that it is not possible to get complete costs from current statements alone, with important costs buried by GP’s statements. CEM encourages all pension funds to adopt the ILPA fee reporting template by asking all GPs to report in this format. Read more

 

 

 

The lead author of a major global study into how the motivations of people in the investments industry are linked to their performance has argued that annual bonuses should be dumped.

A staggering 76 per cent of investment professionals surveyed admitted to letting pressure from members of their board and management team negatively affect their decision-making.

And it has them worried; 17 per cent of investment professionals said they believed their job would be at risk after a short period of underperformance.

“What money does to your brain is detrimental,” State Street Center for Applied Research global head Suzanne Duncan says.

Globally, the majority of investors included in the study believed they would be sacked after 18 months of underperformance. This fear of losing their jobs, along with anxiety about earning short-term bonuses, is causing investment managers to behave in dysfunctional ways, she says.

Boston-based Duncan spoke to Top1000Funds.com as she launched the report, titled Discovering Phi: Motivation as the Hidden Variable of Performance, which was compiled by State Street Corporation’s research arm in conjunction with the CFA Institute. The research is based on a survey of roughly 7000 investment professionals in 20 countries.

The authors of the report state that they have developed a method for quantifying an elusive factor they call Phi, which has a positive impact on organisational performance, client satisfaction and employee engagement.

Phi is an acronym for purpose, habit and incentives – as well as a nod to the 21st letter of the Greek alphabet.

The report concluded a one-point increase in Phi was associated with 28 per cent greater odds of excellent organisational performance, 55 per cent greater odds of excellent client satisfaction and 57 per cent greater odds of excellent employee engagement.

Massive disconnect from purpose

To be a successful investment manager, individuals need a high degree of skill and competence, but they also need the right motivations.

“Why we do something influences how well we do it,” Duncan says.

The researchers found that organisations and teams they rated as having a higher Phi score were significantly more likely to deliver superior long-term investment returns. However, only 17 per cent of investment professionals globally had high levels of Phi.

The report’s underlying data shows why.

Phi is a “socially contagious” quality and spreading it “starts with strong leadership”, Duncan explains. “It is a nature and nurture situation. We need to recruit for Phi, we need to foster it, and we need to pay for it.” Yet the survey responses show this is often not happening.

Just 28 per cent of respondents worldwide said they remain in the investment management industry to help clients achieve financial goals. Also, only 44 per cent of professional investors surveyed believed their leaders articulated a compelling vision and just 40 per cent said they believed their leaders re-examined their own critical assumptions and beliefs.

A mere one-third of respondents believed leaders were spending time teaching and coaching employees.

Incentives are all wrong

Duncan says that despite investment professionals being well paid compared with workers in most other sectors, money is the “number one de-motivator” for the industry. This is because pressure to make short-term incentives leads to high stress levels and reduces the motivation to work in a client’s best interests.

Close to half of all investment professionals surveyed globally reported being treated for a medical condition related to work stress in the past year.

“Thinking about making money narrows the thought process and reduces overall thought power,” Duncan says.

She argues that bonuses needed to be re-designed to make sure they are structured in a way that is fair, transparent and controllable. She praised a trend among some Australian super funds to dump annual bonus structures in favour of five-year incentives.

Young and Phi

Worldwide, workers from the millennial generation recorded markedly higher Phi scores than their older colleagues.

Duncan rejected the idea that this merely reflected the idealism of youth, insisting there is “something different” about what motivates those born in the 1980s and 1990s that she tips to persist as they age.

Looking at another age group, Duncan says there seems to be “an inflection point” at age 51, where Phi scores also dramatically increase.

“I think you get to that point in life and realise it’s not all about you,” she says. “Having children has a similar effect on most people, leading to increased empathy and altruistic motivation.”

The report’s conclusions about how altruistic motivations improve investment outcomes fly in the face of the traditional perception that top-performing fund managers are ultra-competitive and hyper-focused on profits.

At the Investment Management Consultants Association annual conference in Sydney, Australia, in November 2016, P/E Investments managing director Australia and New Zealand, Andrew Harrex, said half-jokingly that he suspected there was “a correlation between arseholes and good fund managers”.

“I’d love to see the analysis,” he said. “I suspect there is a correlation, because you have to have a big ego to say ‘I am right and the market is wrong.’ ” In a sense, the new State Street research is analysis that shows exactly the opposite.

Duncan explains: “That type of individual often outperforms on a short-term basis but it is rare that they continue to outperform on a long-term basis, and our research backs that up. Big egos tend to get caught up in their own behavioural bias and a high degree of confidence in oneself can often lead to a failure to sell when you should.”

Social context

While low levels of Phi are a problem across the industry worldwide, investment professionals in Scandinavian countries reported the highest scores, followed by Australia and Canada.

Duncan says this is a reflection of the “welfare state” mentality in these countries.

“The US is the complete opposite of that … It’s a free-for-all where you look after yourself,” she says.

Duncan explains that while Wall Street is unquestionably the global heartland of financial markets, she doesn’t consider her home country a leader when it comes to long-term investment management.

From 2017, State Street will offer the Phi score assessment tool for all of its clients to use internally and with their external providers.

CFA global president Paul Smith says: “Phi is the variable that’s been missing for too long from the investment management ecosystem. The research shows that when there’s a lack of purpose to temper passion, the balance and alignment of interests and motivations becomes distorted.”

Finland’s €18.5 billion ($20 billion) State Pension Fund (VER) will slightly increase its allocation to hedge funds, in a strategy designed to counter the continued challenges low interest rates create for its sizeable fixed-income holdings.

“We have to be careful increasing our allocation to hedge funds, given interest rates are low and hedge fund returns after fees are hard to find,” explains Timo Viherkenttä, chief executive of the Helsinki-based buffer fund. “On the other hand, low interest rates have made hedge funds a competitive alternative to fixed income.

The two allocations can compete with each other in the portfolio because they are both low-volatility asset classes; we don’t expect high returns but we expect roughly zero from fixed income, so hedge funds have a place in the process,” he says.

The fund has a 3 per cent allocation to hedge funds that, together with risk premia strategies, will grow to closer to 6 per cent.

VER is tasked with meeting Finland’s future pension liabilities, which are set to peak in 2030, when state pension expenditure is expected to be nearly double current levels.

The fund’s appetite for more diversified and uncorrelated returns chimes with Viherkenttä’s view on the current, unpredictable, market.

“Right now, we are in a peculiar situation and it’s very unsettled,” he says. “In recent years, investors have looked at central banks for guidance. Now, politics has taken more of centre stage, with Brexit, then the US [election], and now European elections. The traditional real economy is in the back seat. Take, for example, the rise in the equity market after the US election. Optimists pointed to the rise, but there is a lot of wishful thinking because it is just not clear what policy will be.”

Finland’s ministry of finance rules that VER must devote a minimum of 35 per cent to fixed income, in an allocation the fund divides between liquid and other fixed-income investments. VER’s current allocation exceeds this baseline, with just under half the portfolio in the asset class.

Although it has performed well recently, low interest rates and “unpromising pricing levels” don’t bode as well going forward. Five-year average returns on liquid fixed income languish at 3.2 per cent in an allocation comprising government bonds (22.6 per cent) corporate bonds (25.6 per cent) emerging market debt (21 per cent) and money markets (30.8 per cent). The return-seeking allocation includes corporate bonds and emerging market debt, plus illiquid private credit funds.

Viherkenttä is more optimistic about emerging market returns.

“We have a sizeable allocation to emerging markets. It’s well known that this market came down quite a bit after the US election. The pricing there now is better than a few weeks ago. There may be a bit of beef here.”

While most of the private credit portfolio is weighted to low-risk strategies like senior and real-estate debt, it also includes a higher level of risk, such as distressed credit funds.

The remainder of the portfolio lies in listed equities (now about 40 per cent), a new allocation to position management and diversified investments begun a year ago, and alternatives.

Currency hedging and derivative trading, as well as absolute return funds, fall under the position management and diversified umbrella. Alternative investments include property, private equity, infrastructure and private credit allocations.

“We will increase our allocation to illiquids in search of more diversity,” Viherkenttä notes. “Pricing in illiquids is high; many others also have this ‘great idea’.”

The increased allocation to illiquid strategies will focus on infrastructure and real-estate assets for inflation protection. A “sizeable” percentage of investment in these types of assets, along with private equity, tends to have a Finnish bias. All of VER’s real-estate investments are made through funds or indirectly.

Viherkenttä leads an in-house team of 14 and uses more than 100 managers. The fund’s fixed-income allocation is almost entirely actively managed, while half the equity allocation is in passive strategies.

“In some markets, like large-cap US, it is very difficult to find excessive returns,” he says.

Although passive solutions are more developed and competitive in equities than in fixed income, he says the line between active and passive is evolving.

“Take smart beta,” he says. “This may be index and passive, but the basic choice in this strategy is an active concept.”

He explains that fixed income is evolving to make more passive options available to investors.

“In any major fixed-income market, you will find ETF solutions,” he says. “Whether you want to invest in emerging markets or emerging market local currency, or credit, or US high yield, you would find such products, to invest in a passive way. It’s long been the case in equities and it is increasingly so in fixed income, too. There are more specialised solutions – like factor-based strategies – in equities, but they are on their way in fixed income, too.”

Viherkenttä’s career spans academia and law and includes eight years at local authority pension provider Keva as deputy chief executive. Prior to this, he spent four years as budget director at the ministry of finance, and also as permanent under-secretary responsible for tax policy.

“My legal background helps in many ways in this job across administration and legal matters but I identify most with economics,” he concludes.

Brian O’Donnell, executive in residence at celebrated risk management institute, Toronto-based Global Risk Institute, argues that pension funds need to adopt clear risk strategies to deal with cyber security, climate change and escalating financial risk.

In a webinar hosted by the International Centre for Pension Management titled ‘Risk Governance: Developing an Enterprise Risk Management Framework and Managing Emerging Risks, ranging from Climate Change to Cyber Threats’, O’Donnell draws on his long career in Canada’s financial services sector to highlight today’s most important risks.

He illustrates the growing risk of cyber security with examples of recent breaches in financial services.

The 2015 cyber attack on Japan Pension Services, a government-run agency that manages the public pension system, revealed the personal details of 1.25 million beneficiaries; JP Morgan fell victim to the largest theft of customer data ever in 2014 when hackers revealed personal information of 70 million households and 7 million small businesses; in February this year a cyber attack that investigators have linked to hackers in North Korea drained $81 million from the Central Bank of Bangladesh.

Moreover, it is a risk that is set to escalate with the rise of quantum computing. As computing grows faster and stronger, he believes it will render today’s cyber security “obsolete”, requiring a “quantum defence” to meet the massive increase in computer capacity.

Canada’s pension funds perceive cyber security as a “key risk” to “manage and take seriously”, and he urges the global industry to work as a group and share information to combat cyber crime. There is no benefit in working alone because hackers look for the weakest link, he says. “In Canada, we are all in it together.”

He says that recent cyber attacks should “plant the seed” for pension funds to think about their critical infrastructure risk, and ensure they have a cyber security framework in place.

He highlights the questions executives should ask: “Do we have a formal cyber security framework? What are the top five cyber risks we face? How are employees made aware and trained for their role? Are roles and responsibilities clear? Do we have a response protocol in the event of an attack?”

Climate risks growing

O’Donnell calls climate change “a very serious and significant risk of our time” and urges executives to understand the portfolio risk it holds.

He divides these risks into physical (physical damage to pension fund assets), regulatory (stranding and devaluing of carbon assets), systemic (broader shifts in the market place), and liability (the fiduciary responsibility to manage these risk and to rebalance to manage risk.)

He also draws attention to lessons that the pension industry can learn from the insurance industry.

“There are significant statistics from the insurance industry on physical risk like weather-related damage to buildings,” he says. “If I was a pension fund, I would wonder what this means for the assets I own. Do I have sufficient insurance in place and are my counterparties strong enough? Should I hold assets less susceptible to risk?”

O’Donnell’s third emerging risk is financial, caused by the growing asset bubble and “debt in the system” that has grown since the financial crisis. He notes that “exploding” global debt levels have risen from $150 trillion in 2007 to more than $200 trillion in 2015, and estimates that China’s debt has quadrupled since 2007 to $28 trillion.

It’s a problem that has been fuelled by low interest rates and quantitative easing, and now depends on policy from the US Federal Reserve to solve. “The real question is what will this mean when the next recession hits? If the next recession is steep and violent, how do firms start preparing for this today?” he asks.

In among today’s risk he also notes opportunity for investors in big data. The volume and variety of data coming out of financial firms and stored for analysis will increasingly inform strategy. Data scientists can analyse data to “look at what is happening in the economy”, understand cash flows and “do a better job” of credit analysis, he says.

Central risk culture

O’Donnell believes pension funds can manage risk if they build a strong link between their investment strategy and risk appetite.

A “central risk culture” should lie at the heart of an organisation, something he identifies as behaviour, values and systems: behaviour is characterised by actions of the CEO and values by how an organisation deals with challenges. Systems include a clear accountability of risk.

“Who owns the risk? Everyone should understand their roles and responsibilities. Risk appetite should be fully imbedded; it’s not just a glossy piece of paper but needs to permeate through organisation.”

He characterises risk appetite as the maximum risk an organisation is comfortable taking and risk capacity as the total amount of risk an organisation can take in light of its balance sheet.

“The weakness of risk culture caused the Great Financial Crisis,” he says, and adds that a “broken risk culture” is one that spirals into a blame culture, where difficulties and challenges are met with “pointing the finger.”

 

 

HSBC Bank (UK) Pension Scheme, the pension fund for the HSBC Group’s United Kingdom employees, has adopted a new multi-factor global equities index fund that incorporates a climate tilt.

The scheme – one of the UK’s largest corporate pension funds – has selected the fund for its equity default option worth £1.85 billion ($2.2 billion) in its defined contribution scheme. In doing so, it becomes one of the first pension funds to adopt a multi-factor investment strategy incorporating a degree of climate change protection as its default fund.

“While it is a well-performing fund, we were still mulling over what we could do to make it better,” explains chief investment officer Mark Thompson, who joined HSBC in 2011 prior to which he held senior investment roles for more than 20 years at Prudential Group’s M&G.

“The questions we had were how could we achieve a better risk adjusted return; how could we incorporate climate change protection and how could we make the ESG engagement process better given that it was a passive mandate?” he says.

The query led him to consult with colleagues at FTSE, investment consultants Redington and L&G in a process that culminated in the launch of the so-called Future World Fund.

“The four factors we picked are value, low volatility, quality and size, with the bias towards smaller not larger companies. If you look at how these factors have performed since 2000, they have all outperformed the market cap by some fair margin with a better risk-adjusted return. Between September 2001 and March 2016 the FTSE World Index was up by 7.05 per cent but our index would have been up by 9.6 per cent. The volatility of the new index also comes in lower – 14.8 per cent versus 16.3 per cent.”

Next the team introduced the climate element to the index, tipping away from exposure to carbon emissions and positively towards green revenue.

The fund, which incorporates LGIM’s Climate Impact Pledge, is also a solution to boosting ESG engagement within a passive strategy.

Six global industries are most affected by climate change, says Thompson.

“L&G will engage with these companies. If they are not putting in place strategies on how they will transition their business to a 2°C world L&G will send a clear message, voting against the chairman at the next shareholder meeting, and divesting.”

Rather than the fund engaging directly, he wants L&G to put pressure on investee companies.

“We are not set up to talk to all the companies in which we invest,” he says.

HSBC’s defined contribution beneficiaries choose their own funds, but 90 per cent opt for the default strategy. The fund will replace HSBC’s current passive global equities mandate, which is already managed by LGIM, in January 2017.

ESG is a growing priority across the whole fund where trustees have adopted a core belief that ESG is part of their fiduciary duty; a comprehensive climate change policy was adopted in June 2015.

Yet the latest ESG-focused strategy only affects the £2.6 billion ($3.2 billion) DC portion of the hybrid fund, which has the bulk of its assets in a defined benefit fund worth about £25 billion ($31 billion).

The reason ESG has taken priority in the DC scheme is that these beneficiaries are more exposed to climate risk, argues Thompson.

“Sixty per cent of our members in the DC scheme are under 40. We need to build in protection against climate change here most.”

 

DB strategy all about de-risking

In the DB scheme, investment strategy is shaped around long-term de-risking.

HSBC, an early adopter of LDI, has a liability-driven swaps program involving the use of long-dated interest rate and inflation swaps to manage funding risks.

“The fund is very well hedged and protected against falls in interest rates,” he says.

It also managed to clear a £3 billion deficit between valuations in 2008 and 2011. Since 2011 he has stepped up the de-risking pace, breaking the portfolio into matching and smaller return-seeking parts with the matching assets steadily rising ahead of slated maturity in 2025.

That said, a portion of the illiquid matching assets like property and corporate bonds sit in the return-seeking portfolio and also have long-term, matching characteristics.

It means a steadily declining role for the return-seeking portfolio. Nevertheless, Thompson notes some strategies that have done well, like the “slightly overweight” 4 per cent exposure to emerging markets.

“Emerging markets have done well; and it’s not hedged. We don’t bring it back to [pound] sterling because we like the diversity. Although, of course, I’d like to get to the place where we have no emerging market allocation at all,” he says, in another nod to his de-risking priorities.

Similarly, the fund is shrinking its current 3.4 per cent allocation to private equity.

“We are running down our private equity; it doesn’t make sense to put more in ahead of 2025,” he says.

The emerging market allocation is actively managed; equities are either in passive strategies or smart beta; global credit is a combination of active management and smart beta. Regarding fees, he says: “It’s not a race to the cheapest. It’s a race to the best value.”

Has Brexit hurt the fund?

“No. Our interest rates are hedged; we’ve got inflation and currency hedging in place; we’ve locked down our risk so that whatever happens is ok. We are in a good position.”

He doesn’t believe uncertainties regarding US climate commitments under a new Trump presidency will derail momentum on climate conscious investment either.

“The feedback from Marrakesh is, let’s do it. It’s not going to go away.”

But he won’t be drawn on any future impact of either Brexit and forthcoming European elections, or the US electoral outcome on investment returns going forward.

“I am an economist by training and am used to forecasting. But as I’ve got older I realise that forecasting is easy. It’s just getting it right that’s difficult.”

The election of Donald Trump can’t help but feel like a setback for responsible investment. “Expect the election to herald a wholesale reversal of public policies addressing how corporations and investors tackle ESG rights and risks” said Global Proxy Watch.

As proponents of responsible investment develop their response to the election, one thing remains constant — expect the topic of fiduciary duty to remain on the agenda.

In a principal agent relationship, the agent acts on behalf of the principal. Fiduciary duties exist to ensure that those who manage other people’s money, act in the interest of the principal. In its simplest form, this requires prudent investment. Fiduciary duties do not respond to one election, but an evidence-base, years in the making. At a time of political turbulence, fiduciary duties move carefully forward.

Fiduciary duty requires investors to consider all value drivers, regardless of politics or ethics. If an issue is, or could be, financially material to portfolio value, investors must have a process in place to consider it. Integrating ESG factors into investment decision-making is part of the technology of investment analysis. There is no ambiguity.

It’s why pension funds around the world have added climate change to their risk register. And even if, as Donald Trump has promised, the US withdraws from the Paris climate agreement, other countries will not. US companies cannot be valued in isolation; their stock price is not subject to US policy-making alone. So climate change must be considered. Not least, because it is already disrupting company supply chains.

In 2015, the Department of Labor introduced Bulletin 2015-01, which clarified that ESG issues should be part of the primary analysis of investment decision making. “Keep politics out of our pensions”, said a handful of fringe US commentators. But they missed the point, the Department of Labor has and did. Prudent investment decision-making is not about politics.

The PRI, UNEP FI and The Generation Foundation have contributed an extensive evidence base to the topic of fiduciary duty, including more than 200 interviews with policy makers and investors and legal reviews by 12 law firms. Our report, Fiduciary Duty in the 21st Century, was launched in New York at Morgan Stanley’s Institute for Sustainable Investing. Our research on fiduciary duties in China was launched with a foreword from the chief economist of the research bureau at the People’s Bank of China.

Since their publication, we are preparing roadmaps in eight markets, including the US, to advance fiduciary practice. The roadmaps make a series of recommendations, both policy and practice, that will allow a fiduciary to fully integrate ESG risks. To do so, it is necessary to understand barriers through the investment chain, which start with corporate disclosure.

Corporate disclosure of ESG factors is a necessary, but not sufficient, condition for prudent investment. ESG disclosure is part of a company’s narrative on supply chain security, consumer demand and future value. We recommend companies disclose ESG factors in their annual report, independently assure all financial factors, and use common performance metrics to allow for comparability by industry, portfolio and across time-series.

Our roadmaps also make recommendations on effective shareholder engagement, sometimes referred to as stewardship. Shareholder rights are assets of the pension scheme to be used and monitored by fiduciaries in the best interests of beneficiaries. Corporate engagement is a long-term instrument; benefits accrue over several years. Stewardship practices should be a source of competitive differentiation, particularly among investment managers.

On the relationship between fiduciaries and their beneficiaries, our recommendations focus on the pension fund regulator. Rather than new regulation, in most countries it is clarification of existing regulation. For example, the UK Law Commission stated that “there is no impediment to trustees taking account of environmental, social or governance factors where they are, or may be, financially material”, which should be clarified in a revision of the UK investment regulations.

In prioritising our recommendations, the PRI, UNEP FI and The Generation Foundation is mindful of political feasibility. It would be wrong to say politics doesn’t matter.

In PRI’s analysis of the French Energy Transition Law, which requires investors to report on a portfolio’s carbon emissions, the PRI identifies political leadership as one of the five necessary conditions that enabled the law’s implementation. A change of government in the Province of Alberta presents an opportunity to extend Ontario’s pensions act, which requires Ontario-registered pension funds to disclose whether ESG factors are incorporated into a pension plan’s investment policies and procedures.

So politics matters but the essence of fiduciary duty remains unchanged. Investors must consider all long-term value drivers. It is not the origin of the factor, but rather its financial materiality which is of relevance. And that includes ESG factors, regardless of the ebb and flow of politics.

 

Will Martindale is head of policy at the Principles for Responsible Investment