Analysing equity market returns over a very long period – 1900 to 2014 – reveals a dramatic transformation in the dominance of certain sectors. Elroy Dimson, chair of the Centre for Endowment Asset Management at Cambridge Judge Business School, and emeritus professor of finance at London Business School, outlined the lessons investors can take from long term financial asset returns at the Conexus Financial Investor Think Tank in London last week.

In his presentation “Investing in financial assets for the long term” Dimson analyses sectors and returns over more than 100 years using a database of market returns from 23 countries from the period 1900 to 2014 that he co-developed with Paul Marsh and Mike Staunton.
The database includes 21 unbroken histories – with China and Russia having broken histories – that looks at stocks, bonds, bills, inflation, currency, and GDP over 115 years.
Analysing the data reveals a “great transformation” in the dominance of industries, or sectors. For example in 1900 in the US around two thirds of the index was in railroads, but come 2015, the industries that occupied 80 per cent of the weight of the index in 1900 either don’t exist or are very small. In modern-day analysis the index is made up of banks, health, tech and other industrials.
“We can learn something from these long-term changes,” Dimson says. “In 1900 about 80 per cent of the weight was in sectors that don’t exist or are very small today, and conversely the industries that dominate today didn’t exist a century ago.”
In the UK it is the same pattern, with 65 per cent of the index made up of industries that don’t exist in 2015.
“Long term sector changes are important,” Dimson says, “particularly when you look at performance.”
From the period 1900 to 2014 the top performing sector in the US was tobacco.
“$1 invested in 1900 would be worth $6.3 million in 2010,” Dimson says. “In the UK alcohol was the biggest winner, with £1 invested in 1900 giving you $243,152 in 2010.
“When you are projecting into the future, this history tells you there are only a few sectors that survived the time period that outperformed the market.”
Dimson points out that one of the risks of looking at history like this is it leaves out industries like wagon makers, canal boats, steam locomotives or candle makers that were not going to survive. It is also important to consider that the start date of the period being assessed will affect the result.
“If you start at 1930 then history is very different,” he says.
What is clear is there is a “technology effect” in markets over time.
“200 years ago a disruptive technology was the use of water canals, where you could move 60 times the amount of goods compared to wagons. But if you were an investor in canals the returns weren’t very good in the 19th century. Investors lost out.”
Over time, this theme of disruptive technologies not benefiting investors plays out.
In fact analysis shows that the creators, owners and innovators of new technology, along with society, are winners, but investors are often losers.
Dimson quotes from Alasdair Nairn’s book, “Engines that Move Markets: Technology Investing from Railroads to the Internet and Beyond”, and concludes that there are a number of timeless lessons from technology that still apply today:
-new technologies generate bubbles
-there needs to be a sustainable competitive advantage
-and the greatest beneficiaries of new technologies are the insiders including the innovators and founders of the businesses, but also consumers and societies – but not necessarily the investors.
One way of demonstrating this is to look at the returns of companies from the time of their initial public offer (IPO).
Looking at market adjusted returns for IPOs in the US reveals that on the first day they trade at +17.9 per cent and for the next three years trade at -18.6 per cent.
Similarly in the UK on the first day, IPOs trade at +8.5 per cent, for the next two years trade at -9.4 per cent and for the next five years trade at -31.6 per cent.
Further, the returns improve with the years of seasoning since IPOs.
Dimson, Marsh and Staunton looked over the period 1980-2014, and £1 invested in a strategy that holds companies that are more than 20 years old since the IPO of the company would generate £61.
If the strategy was to hold companies which at the start of each calendar year had been listed for 8-20 years since their IPO, they would have generated £49. In contrast £1 invested in a strategy with companies that had 4-7 years since the IPO would return £33, and £1 invested in companies with less than three years since the IPO would generate £20.
“The older the company being purchased the better the performance. The long-term record is very striking,” Dimson says. “In general IPOs create new industries which on average underperform in their early years.”
In a bid to assess the performance of new technologies over the long term, and in fact whether backing new technology is a recipe for good performance, the analysis shows that railroads were the only transportation industry to outperform the market in the period 1900-2014.
“$1 invested in railroads in 1900 generated $62,019 against the market of $39,134, compared to roads that produced $10,436 and air that produced $7,194,” he says.
Dimson goes on to say that weighting of industries by country in the FTSE International shows there are many countries that are dominated by a couple of industries. In fact there are many countries that have less than 50 per cent in three industries.
“To diversify across industries, investors need to invest globally,” he says.
Taking sector analysis and applying it to responsible investing, Dimson shows the outperformance of “sin” industries since 1900.
In the US, tobacco beat the market with a return of 14.6 per cent versus 9.6 per cent, and in the UK tobacco beat the market by a similar margin.
While tobacco was the best performer in the US, in the UK alcohol has been the best performer since 1900.
Similarly taking the FTSE index, it shows the return on markets ranked by their corruption tendency showed that 21st Century returns had been highest in the most corrupt countries.
While there are a number of strategies for implementing responsible investing – including exiting companies and engaging with companies – Dimson argues that exiting companies may depress stock prices and raise the expected returns from vice stocks.
He says engaging with companies improves corporate behaviour which tends to be followed by share price gains. And says a strategy may be to buy the shares of irresponsible companies, clean up the business and then move on to the next “clean-up” opportunity.

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DELEGATES
Jonathan Anayi, director, investment solutions, Winton Capital
Ciarán Barr, investment director, RPMI Railpen
Keith Carne, first bursar, Kings College, Cambridge
Sarah Carter, executive director, Newton Centre for Endowment Asset Management, Cambridge University
Nick Cavalla, chief investment officer,
Cambridge University
David Chambers, director of the Centre for Endowment Asset Management at Cambridge Judge Business School and associate director of the Centre for Financial History and a member of
the Cambridge Corporate Governance Network
Norman Cumming, chair of the investment committee UnLtd: The Foundation for Social Entrepreneurs
Judy Curry, chief executive, Commonwealth Education Trust
Elroy Dimson, emeritus Professor of Finance
at London Business School and chairman of the Centre for Endowment Asset Management at Cambridge Judge Business School
Sébastien Doisy, chair of the management board of the Pension Reserve Fund of the Council of Europe
James Duberly, director of pensions investments, BBC Pension Trust
Stefan Dunatov, chief investment officer,
Coal Pension Trustees Investment Ltd
Mark Fawcett, chief investment officer, NEST
Steven Fogel, chairman, Sparrows Capital
Yariv Haim, founder, Sparrows Capital Limited
Tom Joy, director of investments, Church Commissioners for England
Dan Melley, global head of consultant relations, Winton Capital
Narayan Naik, Professor of Finance, London Business School and Director of the Hedge Fund Research Centre
Rosemary (‘Rosie’) Norris, director, Rosemary Norris Consulting
Roger Otten, Investment manager, Philips Pension Fund
Fahd Rachidy, partner and investment manager, Sparrows Capital Limited
David Renton, finance and development director, Guy’s and St Thomas’ Charity
Kerrin Rosenberg, chief executive, Cardano
Olivier Rousseau, member of the management
board, Fonds De Reserve Pour Les Retraites (FRR) – France
Padmesh Shukla, CFA, investment officer, TfL Pension Fund
Hugh Smart, chief investment officer, British Steel Pension Fund
Fahd Rachidy, partner and investment manager, Sparrows Capital Limited
Ananda Voce, Winton Capital Management
Amanda White, Editor of conexust1f.flywheelstaging.com, Conexus Financial

 

 

Jonathan Anayi, director, investment solutions, Winton Capital

Jonathan Anayi is a director of Winton’s investment solutions team. He is head of UK clients covering Winton’s business and relationships with both institutional and wholesale investors in the United Kingdom.

Anayi joined Winton in 2010 where he has helped to build up Winton’s institutional client base of pension
funds, endowments and foundations in North America.

Prior to joining Winton, he spent four years at GAM running the company’s UK institutional sales effort. He previously worked at Lehman Brothers as part of the corporate strategy team working for the European chief executive’s office, and spent four years as a management consultant in the strategy team at Accenture serving banks and asset manager clients.

Born and educated in the UK, Anayi holds a BSc in Business and Computer Science from Loughborough University,
and the series 7, 17, 32 and 64 regulatory qualifications. Back to top

 

 

Ciarán Barr, investment director, RPMI Railpen

Ciaran Barr is an investment director at RPMI. Along with Paul Bishop, he is responsible for managing the various investment functions, ranging from advising on client strategy to researching investment ideas, asset allocation and portfolio construction.

He joined RPMI in 2009 and was previously responsible for leading the strategy team in generating views and ideas on international economies and financial markets, as well as recommendations across the portfolios.
As part of his role, he regularly presents to the trustees on a wide variety of matters.

Most of Barr’s previous career was spent at Deutsche Bank, including the role of chief UK economist. He holds an honours degree in economics.
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Keith Carne, first bursar, Kings College, Cambridge

Keith Carne is currently the first bursar at King’s College, Cambridge. He was previously a lecturer in the mathematics department of the University of Cambridge and had been on the academic staff at Université de Paris VI and Rutgers University, US. His research interests are in complex analysis and geometry. Back to top

 

Sarah Carter, executive director, Newton Centre for Endowment Asset Management, Cambridge University

Carter is executive director of the Newton Centre for Endowment Asset Management at Cambridge University. The centre focuses on developing understanding of investing for the long run. It addresses the challenges faced by endowments, sovereign funds, families and other long-horizon investors; the lessons from financial market history; the benefits of responsible investing and active ownership; and strategies followed by truly long-term investors. Carter works alongside the centre’s academic director to support and develop it as a platform for research, education and networking in this area.

Previously, Carter set up and managed Cambridge Judge Business School’s post-experience Master of Finance degree. Back to top

 

Nick Cavalla, chief investment officer, Cambridge University

Nick Cavalla is chief investment officer at Cambridge University. He is responsible for the
management of central assets of the university including its endowment fund.

Previously Cavalla was employed by Man Investments – latterly as chief investment officer of Man global strategies. He has also been a director of GNI Limited and portfolio manager of a hedge fund investing in developed foreign exchange markets. He is a member of the Association of Corporate Treasurers and a graduate in Mathematics of King’s College, Cambridge, where he was elected to an Extraordinary Fellowship in 2012. He is Fellow in Finance
at the Judge Business School. Back to top

 

David Chambers, director of the Centre for Endowment Asset Management at Cambridge Judge Business School and associate director of the Centre for Financial History and a member of the Cambridge Corporate Governance Network

David Chambers is University Reader and Keynes Fellow at the Judge Business School, Cambridge University and
academic director of the Newton Centre for Endowment Asset Management. He has a PhD from the London School
of Economics and has published his research in leading finance and economic history journals.

His research has been covered by the Financial Times, The Economist, the Wall Street Journal, the Nikkei,
the BBC and Bloomberg.

In 2012, he was the Thomas McCraw Fellow at Harvard Business School. Prior to returning to full-time academia in 2001, Chambers worked for 20 years at Barings, Hotchkis & Wiley and Merrill Lynch gaining experience in asset management, mergers and acquisitions and venture capital in Europe, Japan and the United States. He sits on the investment committees of Downing College, Cambridge and the University of London and of the Cambridge University Assistants Pension Scheme. Back to top

 

Norman Cumming, chair of the investment committee UnLtd: The Foundation for Social Entrepreneurs

Norman Cumming runs CR Global, a global macro hedge fund. He has an MA in Economics from Cambridge
University. He worked at HM Treasury; at Shell International; and at Brinson Partners and its successor organisations, ultimately UBS Global Asset Management (where he became head of fixed income), before he
founded CR Global in 2006.

He is a member of the investment committee of Clare College Cambridge, and led the college’s initiative to borrow-to-invest in 2008. He is a trustee, and chairman of the investment committee, of UnLtd, the UK Foundation for Social Entrepreneurs. Back to top

 

Judy Curry, chief executive, Commonwealth Education Trust

Curry is a chartered accountant and led the business model assurance team at PricewaterhouseCoopers. She
has degrees in mathematics from Oxford University and mathematical trading and finance from Cass Business School. She studied asset management with Professor Dimson at London Business School.

She is now chief executive of the Commonwealth Education Trust, which invests in primary and secondary education across the Commonwealth, with subsidiaries in England, South Africa and New Zealand and interests in India and Singapore. It conducts research through Cambridge University, provides professional development ‘Massive Open Online Courses’ with Coursera®, publishes children’s literature and invests in schools and education companies. Back to top

 

Elroy Dimson, Emeritus Professor of Finance at London Business School and chairman of the Centre for
Endowment Asset Management at Cambridge Judge Business School

Elroy Dimson is Chairman of the Centre for Endowment Asset Management at Cambridge Judge Business School,
and Emeritus Professor of Finance at London Business School. He chairs the strategy council for the Norwegian
Government Pension Fund and the advisory board for FTSE Group. He is on the steering committee of the Financial Economists’ Roundtable, and is past president of the European Finance Association. He serves on the investment committees of Guy’s & St Thomas’ Charity and the Foundation for Social Entrepreneurs. His publications include Triumph of the Optimists, Endowment Asset Management, the Global Investment Returns Yearbook, and many journal articles. Back to top

 

James Duberly, director of pensions investments, BBC Pension Trust

Duberly is responsible for the in-house investment team which recommends and implements investment strategy on behalf of the trustees of the BBC’s £12 billion ($18 billion) pension scheme.

Prior to joining the BBC Pension Trust in June 2011, he worked at Russell Investments, the Bank for International Settlements and GH Asset Management. He is also the treasurer of the Neuroblastoma Society in the UK.Back to top

 

Stefan Dunatov, chief investment officer, Coal Pension Trustees Investment Ltd

Stefan Dunatov is chief investment officer at Coal Pension Trustees Limited, which is responsible for
£20 billion ($30 billion) of investments of the Mineworkers’ Pension Scheme and the British Coal Staff Superannuation Scheme.

Prior to Coal he was a director at Deutsche Asset Management, portfolio strategist at Equitas, an advisor at the Reserve Bank of New Zealand and economist at HSBC. Dunatov holds undergraduate degrees in law and economics from the University of Auckland and a Masters in Economics from The London School of Economics. He is a member of the 300 Club, a group of global investment professionals whose aim is to raise awareness of the impact of market thinking and behaviours in order to improve investment governance and strategy. Back to top

 

Mark Fawcett, chief investment officer, NEST

Mark Fawcett has been an investment manager for the last 27 years and managed money at a variety of institutions.

At Gartmore, he was head of Japanese equities while at American Express Asset Management International, he was chief investment officer.

Before joining NEST, Fawcett was a partner at the boutique investment manager Thames River Capital LLP.

He has an MA from Oxford University and an MSc from the London Business School. Back to top

 

Steven Fogel, chairman, Sparrows Capital

Until March 2012, Steven Fogel was managing partner of the London office of international law firm Dechert LLP, where he also served for many years as a board member. He was the senior partner at Titmuss Sainer before its merger in 2000. In addition, from 2008 to 2010, he was on the advisory board of surveyors CWM.

Today, he is chair of Uropharma, a medical device company, is a non-executive member of the EMEA board of international solicitors, King & Wood Mallesons and is an adviser to the Landon Family Trusts.

In addition Fogel undertakes a range of pro bono work. As well as being on the University of London’s board of trustees, he has also worked with a number of not-for-profit organisations, including the international wheelchair charity Motivation, and the Freud Museum. Back to top


 

Yariv Haim, Founder, sparrows Capital Limited

Yariv Haim has more than 10 years’ experience in strategic investments, risk management and asset allocation. Haim is the key executive and investment manager at Sparrows. He has worked with the Eliashar family for more than 15 years. He is a sought-after lecturer in wealth management and efficient and contrarian investing
strategies. He holds a BA in Economics and an Executive MBA from Tel-Aviv University. Back to top

 

Tom Joy, director of investments, Church Commissioners for England

Tom Joy is director of investments for the Church Commissioners and advises on the strategic development of their multi-asset investment portfolio in light of the increasing complexity of the financial markets. He is responsible for the integrated management of the Commissioners’ assets, which stand at £6.1 billion ($9.2 billion). Back to top

 

Dan Melley, global head of consultant relations, Winton Capital

Daniel is global head of consultant relations at Winton Global Investment Management, which applies an empirical scientific approach to exploiting inefficiencies in markets. Melley joined Winton in 2015 following a 17 year career at Mercer. At Mercer Melley built the UK fiduciary management offering from inception to about $20 billion assets under implementation business. He has worked with institutional investors in the US, UK and South Africa on strategic asset allocation, manager selection and manager research. A CFA charterholder, Melley graduated with honours from the University of Notre Dame in Indiana, USA. Back to top

 

Narayan Naik, professor of Finance, London Business School and Director of the Hedge Fund Research Centre

Educated at the Indian Institute of Technology in Bombay and the Indian Institute of Management in Ahmedabad, Professor Naik subsequently worked as an executive for Special Steels and the Taj Group of Hotels and as a consultant for the World Bank before obtaining a PhD in Business Administration at Duke University, North Carolina in 1991.

He joined London Business School as an Assistant Professor of Finance on completing his PhD, and was promoted to Associate Professor in 1997. Over the last couple of decades he has played a key role in the development of the finance group at LBS, most notably in the role of the director of the PhD programme in finance, the director of the investment management programme and the director of the BNP Paribas Hedge Fund Centre at the London Business School.

Naik’s research interests include hedge funds, portfolio selection, risk management and market microstructure. Over the last decade he has authored a significant body of work in these areas, which has appeared in the top finance journals, leading practitioner journals and financial press. He has appeared many times on CNN, CNBC, Bloomberg, BBC, ITV and other news channels as expert finance academic. He has consulted widely during his career for the World Bank and private corporations in the UK, USA and Far East. He has also designed and taught tailor-made courses in corporate finance and investment management for leading investment banks. Back to top

 

Rosemary (‘Rosie’) Norris, director, Rosemary Norris Consulting

Rosie Norris runs an FCA authorized consulting business advising family offices and endowments on investment
strategy, manager selection, fee negotiation and general best practice. She is a board member of the £5 billion ($7.6 billion) Charities Official Investment Funds, a trustee of Buttle UK and on the advisory board of hedge fund Inflection Point Investments.

After Cambridge University, Norris started at Warburg Investment Management in 1982, latterly managing institutional accounts. She subsequently held senior positions at Gerrard Vivian Gray (chief investment officer) and Schroders. In 1998 she took an MSc in Business Management (Sloan – LBS), studying electives in ethics and corporate governance. Back to top

 

Roger Otten, investment manager, Philips Pension Fund

Roger Otten, PhD. is an investment manager at Philips Pension Fund in The Netherlands. He is responsible
for advising the board of trustees on investment strategy, manager selection and monitoring of the investment portfolio of about €18 billion ($20 billion). In addition to that he is responsible for integrating the ESG policy across all asset classes the pension plan invests in. Otten previously held positions in strategic advice and manager selection/monitoring at ING Investment Management and APG Investments.

Next to his position at Philips Pension plan he is Assistant Professor of Finance at Maastricht University in the Netherlands. His main research topics include mutual funds and the impact of ESG on portfolio risk and return. Otten has been published in various academic journals such as Journal of Banking and Finance, European Financial Management, Managerial Finance, Accounting & Finance, Pacific Basin Finance Journal, Journal of Asset Management and the Journal of Business Ethics. Otten is a research fellow of the European Centre for Corporate Engagement (ECCE) and is on the steering committee of the UNPRI Academic Network.

He holds both a PhD and MSc in finance from Maastricht University. Back to top

 

David Renton, Finance and development director, Guy’s and St Thomas’ Charity

David Renton joined the charity in 2011 as finance and development director. He previously spent many years as a managing director and member of the leadership team at Hawkpoint Partners, a leading independent corporate finance firm. Back to top

 

Kerrin Rosenberg, chief executive, Cardano

Kerrin Rosenberg is chief executive of Cardano in the UK, with overall responsibility for the business
which has a client base of pension funds with over £50 billion ($76 billion) in assets.

Together with a few other senior colleagues, Rosenberg established Cardano’s UK business in 2007 with the aim of applying risk management-based principles to pension fund management. Cardano has pioneered the use of innovative investment concepts that are now commonplace today.

He has significant experience working with trustees from a range of different schemes in a range of different scenarios, with a focus on communicating complex strategies in an easy to understand way. Over the past 20 years, Rosenberg has advised over £65 billion (99 billion) worth of UK pension funds. Prior to Cardano, he was a Partner at Hewitt (today AonHewitt). Rosenberg graduated from the University of Manchester with a Degree in Economics, and qualified as an actuary in 1995. Back to top

 

Olivier Rousseau, member of the management board, Fonds De Reserve Pour Les Retraites (FRR) – France

Olivier Rousseau was appointed as a member of the management board of the FRR in November 2011. He also chairs the asset manager selection committee.

In 1986 he joined the French Treasury in Paris where he held various positions (deputy head of division, head of division).

He worked 11 years for BNP Paribas in international banking and finance in Paris, Tokyo, London, Singapore, Hong Kong and Sydney.

He also served on the resident board of directors of the European Bank for Reconstruction and Development in London and as regional economic counsellor at the French embassy in Stockholm.

Rousseau graduated from the French National School of Administration (ENA) in 1986. He also holds a degree in political sciences and master degrees in law and economics from the University of Aix-en-Provence. Back to top

 

Padmesh Shukla, CFA, investment officer, TfL Pension Fund

Padmesh Shukla is the head of investments for the $12.5 billion Transport for London Pension Fund
where he has lead major changes, from diversifying the fund’s bond and equities portfolio to building its more than $2.5 billion ($3.8 billion) alternatives programme of hedge funds, infrastructure, PE and real estate. Emerging markets and climate change are of particular interest to him, having previously worked at the World Bank and Centre for International Development and played a key role in establishing the London Green Fund. He went to Harvard University for his Masters in International Economics and Development (major in Finance) and has a Bachelors in Civil Engineering. Back to top

 

Hugh Smart, chief investment officer, British Steel Pension Fund

Hugh Smart joined the British Steel Pension Fund in 2005 and as chief investment officer has overall
responsibility for the management of the scheme’s investment portfolio, reporting directly to the
scheme chairman.

He has almost 30 years’ experience in financial services, having previously headed Swiss Re’s UK asset management operation, prior to which he held senior treasury roles in global reinsurance, investment banking and technology companies. He sits on the advisory committees for a number of the scheme’s very limited outsourced investments and the Pension Fund Investment Forum and is an independent advisor to the Pilkington Superannuation Scheme.

Smart is a chartered accountant and a Fellow of the Association of Corporate Treasurers where he has served as a member of the Education Committee. He is a member of the CFA Society of the UK and an alumnus of London Business School. He holds a degree in Mathematical Statistics and Operational Research from Exeter University where he was sponsored by British Steel.

British Steel Pension Fund was awarded Best In-House Investment Team and Best UK Pension Fund 2014; Best Long Term Investment Strategy 2013; Best European In-House Investment Team 2012; joint Best European In-House Investment Team/ Pension Fund Owned Asset Manager 2011; Best European Corporate Pension Fund 2008 and Best UK Pension Fund
2008 by IPE (Investment & Pensions Europe). Back to top

 

Colin Tate, chief executive, Conexus Financial

Tate has nearly 20 years’ experience in media, both as a publisher and marketing executive at Trade News, Reed Business Publishing and InvestorInfo. Before Conexus Financial, he headed his own design and advertising agency. He has been a commentator on and proponent of industry reform, and the need for creating trust between superannuation members and the financial advice industry. Back to top

 

Amanda White, editor of conexust1f.flywheelstaging.com, Conexus Financial

White is responsible for the content across all Conexus Financial’s institutional media and events. She is the editor of conexust1f.flywheelstaging.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 18 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly.

She waspreviously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management.

She has a Bachelor of Economics and a Master of Arts in Journalism and is a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. Back to top

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Institutional investors do not act on their own expectations when choosing fund managers, rather their reliance on consultants, and past performance, exacerbates the agency problem in the institutional investment supply chain a new study from Oxford University shows.
Using survey data for 1999-2011 the academics analyse the views of plan sponsors on their asset managers, it covers investors with assets of about $7.6 trillion.
Using survey data institutional investors’ expectations about the future performance of fund managers and the impact of those expectations on asset allocation decisions is analysed.
“We find that institutional investors allocate funds mainly on the basis of fund managers’ past performance and of investment consultants’ recommendations, but not because they extrapolate their expectations from these. This suggests that institutional investors base their investment decisions on the most defensible variables at their disposal, and supports the existence of agency considerations in their decision making,” the study says.
The analysis looks at future manager performance as a function of three sets of possible determinants: first, the past performance of the asset managers; second, various non-performance attributes which plan sponsors identify in those asset managers; and third, the recommendations of asset managers by investment consultants.
The study then sets the plan sponsors’ expectations, and the possible drivers of these expectations, against the actual future performance of the asset managers. And the compares the plan sponsors’ expectations of asset manager performance, as well as past performance, consultants’ recommendations, and other factors, with the fund flows in and out of asset managers.
“This analysis allows us to test whether the well documented correlation between fund flows and past performance results from investors extrapolating future performance from past performance, or from agency problems, or both. If the correlation between fund flows and past performance results from plan sponsors extrapolating future performance from past performance then any influence of past performance on flows should be channeled through its effect on the expectation of future performance and, to the extent that these measures disagree, only expected future performance should matter. Money should not flow to funds with good past performance unless investors expect these funds also to do well in the future, and as a result only expected future performance, not past performance should be significant in a multivariate regression,” the study says.
The study finds that fund flows are driven by consultant recommendations and past performance of the fund managers.
“The fact plan sponsors do not act on their own expectations, or do so only marginally, when making investment decisions is consistent with agency rather than behavioral effects on the part of plan sponsors. A behavioral explanation for this would require us to believe
that plan sponsors take the trouble to form expectations about the future but then, unwittingly, fail to act on those expectations. It seems more likely that their actions are at variance with their own expectations because they feel that past performance and consultants’ recommendations are a more defensible explanation for their decisions.”

To access the paper click below

insitutional investor expectations, manager performance and fund flow

The Fiduciary Investors Symposium will be held at Oxford University from April 19-21.
For further information contact amanda.white@top1000funds.com

Usually focusing on how to design the best low-volatility strategy, David Blitz, Matthias Hanauer and Pim van Vliet have set out to construct a very bad low-volatility strategy. Comparing good and bad low-volatility strategies they found very different performance characteristics. Clearly, not all low-volatility stocks are created equal. The results highlight the importance of being selective when investing in low-volatility stocks. What differentiates a successful low-volatility approach from an unsuccessful one?

Australia’s largest superannuation fund, AustralianSuper, is considering whether it should have its own investment management and currency hedging teams based in Europe and America.

Due to the mandatory nature of the system in Australia, the current rate of funds under management growth means assets are doubling every four to five years. Peter Curtis, head of investment operations at the A$85 billion fund is awed by the change in investment operations model it would need to match this growth.

“The capability of what you need within a super fund to meet this wall of money is quite phenomenal,” he says.

He argues that to respond to this challenge a greater level of self-management was inevitable. In many cases the money held by AustralianSuper in individual asset classes was greater than the total assets under management of the specialist managers it used. Secondly, if the fund did not build internal capabilities when it had the scale to do so, it would be only contributing to the sometimes great profits of providers such as investment banks.

“Do we help investment bankers upgrade their Ferrari every four to five years or do we do more in-house?”

As part of this expansion of managing money in-house it is considering where it sets up operations and offices, with one of the functions most in need is currency hedging.

The fund has increased its international equities from 25 per cent in 2013 to 34 per cent today, and by the end of 2015 AustralianSuper is planning to start managing its first slice of these international equities with a nine person team in Melbourne.

“AustralianSuper is committed to building its global capabilities to lower external management costs and deliver the best returns for members over the coming years,” Curtis says.

AustralianSuper aims to manage about 40 per cent of its assets in-house within three years. It already has in-house teams overseeing some of its Australian equities, infrastructure, property and cash holdings and has just hired two managers for Australian small cap investing.

Reducing reliance on external fund managers is expected to deliver savings of around $140 million annually over the coming years.

“The global equities team of around 10 people – which is currently being recruited – will be based in Melbourne and have a mix of Australian and international managers. This will ensure the team operates in close conjunction with the wider investment team and understands the unique culture of ‘Members First’ that underscores every decision taken by AustralianSuper. International equities currently comprise 34 percent of the fund’s assets, while Australian shares make up 27 per cent. This has changed from 25 per cent in international shares and 29 per cent in Australian equities in June 2013,” he says.

The fund now has  279 staff  and manages 15 per cent in house, and aspires to manage 40 per cent in house by 2018.

Curtis says as the allocation grows in proportion and size, AustralianSuper will end up  running a “massive currency hedging book”, that might be more efficiently run in the model of large Canadian pension plans that have set up offices in different time zones.

Notably the Canadian Pension Plan Investment Board has overseas investment offices in Hong Kong, London, New York and Sao Paulo on the rationale that a local presence and local talent ensures it has “the right knowledge and relationships to make the best investment decisions possible” in Asia, Europe, North and South America.

AustralianSuper already carries out its own economic analysis on the Chinese economy from a three person team in an office in Beijing.

Meanwhile Australia’s largest institutional fund, the A$109 billion Future Fund does not have the regular input of contributions from the public, having been set up from several individual payments from government coffers. It has explored the rationale of a New York office, but decided against it.

David Neal, chief executive of the Future Fund, said an infrastructure team in New York would inevitably end up doing deals from that office contrary to the fund’s bid to have a purely objective approach to investment opportunities.

“We do not have an allocation to US infrastructure. We have an allocation to our best ideas at any one point in time,” said Neal.

He describes the negative effect as a “cultural dilution” of the fund’s process which regularly sees all senior members of the team meeting around the table in its main Melbourne based boardroom.

“Yesterday, we had all the senior people sitting here talking about our entire private equity portfolio in significant detail. You make sure that those sector heads have a very deep understanding of what the private equity sector offers. We do that with all the sectors,” he says.

The purpose of this close scrutiny of each sector is that the whole team knows what constitutes a good idea for the fund, and fully understands what the fund has most of.

“If you have someone sitting in New York looking for opportunities, I do not know how you get them as integrated. We would rather get on planes, which is tiring and expensive, but we think it is worth it.”

 

The decision by the Stanford University endowment to divest from coal stocks might produce some positive PR, but from an investment perspective it’s only making them worse off, says Andrew Ang, professor of finance at Columbia University, who says the move prompts the bigger question of what the purpose of a university endowment actually is.

 

The latest investor case study for student discussion and examination by Andrew Ang and Bruce Usher at Columbia Business School examines the case of Stanford’s endowment divesting from coal stocks.

While not expressed in the case, which instead presents the facts for students to discuss, Ang’s view is that divestment of this kind is narrow and has no effect on the stocks or activities of the companies invested in. Further, he argues, that such a move makes investors worse off by narrowing their investment universe.

“You can’t subtract from a company by selling a share, it’s already committed capital, it’s just changing the ownership not the amount of capital. By definition you can’t have direct aggregate impact by divesting,” he says.

While he says best practice is different for different institutions, for institutions like Stanford they would have more impact by allocating to technology research than they would by a narrow divestment.

“You can only do worse by imposing constraints on your investment process, the question is how much,” he says. “Constraints can make you worse off so the question is how much it costs you. In Stanford’s case it is a narrow divestment so the cost is not that great.”

Ang says climate change is very important but it is best addressed through international agreements and treaties like a price on carbon or a tax.

“There is a role for asset owners to voice their support there, but one institution divesting won’t have much impact,” he says.

In the case of Stanford, and other university endowments in the US, divestment of carbon and carbon-related stocks has been driven by students.

“Students have been increasingly vocal, they are clearly an important constituent of the university but they are not the only one. Stanford and others wouldn’t have done anything if not for the student movement.”

But the prime question, Ang says, is whether the role of the endowment is financial or do to the right thing.

“There may be some benefit in symbolism, and it is not that costly for them to divest because it was very narrow sector, only coal stocks. It is a narrow decision, and might send a symbolic message but it doesn’t do anything in broad societal change,” he says.

“There are future students and faculty that are not represented at the table, and if one purpose is to fund the future, then by divesting they have made the future worse off.”

But importantly, Ang says this case reflects deeper issues.

“Universities have large amounts of money but it is not clear what the actual mission for the endowment actually is.

They have more than sufficient funds to meet certain aid, for example it is peanuts to meet student aid requirements, and student populations haven’t increased from a generation ago. Do we need to spend so much on non-educational activities like fancy dorms, athletics and if the amounts paid to professors?”

Ang says it is unclear what the purpose of these large amounts of money is, and describes endowments as “aspirational without limit, and accumulation without end”.

There is also a keeping up with the Joneses effect, with endowments competing with each other on performance rankings and investment staff remuneration based on their relative performance.

 

 

The student case study, Stanford Dumps Coal can be accessed here.