Pension funds are becoming vocal ahead of the G20 leaders summit next week, reiterating the need for action over tax reform, and encouraging world leaders to consider financial reform that encourages long-term investing.

The UK’s Local Authority Pension Fund Forum, which is a collaborative shareholder engagement group of 61 local authority pension funds with combined assets of £150 billion, has called on G20 leaders to work collaboratively to implement systemic change that embodies transparency and disclosure in all relevant multilateral, bi-lateral, legislative and regulatory processes and agreements.

“It is our view that financial secrecy and aggressive tax practices do not best meet our underlying objectives as inter-generational investors aiming for sustainable value creation. Such practices also hinder the internal efficiency and capability of financial systems to more effectively identify, develop and match productive investment opportunities and long-term value creation strategies with the patient capital contained within retirement funds and national savings pools.”

Under the broader umbrella of building global economic resilience, one of the goals of the G20 is “modernising the international tax system to keep pace with the changing ways people and companies do business”.

In a statement, the LAPFF said that the OECD/G20 initiatives to build global economic resilience are vital to increasing stability and integrity in financial markets and mitigating risk of damage to national economies, retirement savings and the trust of civil society in the operation of global capital, its key institutions, banks and transnational corporations.

“It is our view that taxation reforms that ensure comprehensive transparency and disclosure on a country by country, public basis will best assist us as asset owners to undertake our own investment governance, risk management and due diligence obligations, vital to carrying out our fiduciary duties.”

Separately, global trade unions have unveiled a new initiative to tackle tax evasion by integrating tax risks into responsible investment policies in pension funds worth more than $20 trillion where unions and their trustees are involved in fund governance.

The global union call for action for pension fund responsible tax practices, is a a statement signed by 45 union bodies from 19 countries and supports rule changes for fair and responsible tax practices as envisioned by the G20 OECD Action Plan on Base Erosion and Profit Shifting (BEPS).

“Attempts to increase short-term returns through aggressive tax planning undermine the sustainability of our economies. As the stewards of workers’ capital, pension funds should to take reasonable steps to address tax risk in their investment portfolios,” Sharan Burrow, ITUC general secretary said.

The initiative sets out trade union expectations on how pension funds should address tax risks, including evaluation processes for existing investments, conducting due diligence for any new investment mandate, encouraging corporate country-by-country tax reporting, and engaging with external fund managers to that end.

The trade union statement also raises concerns about the growing pressures from business groups and large multinational enterprises to push back against the G20-endorsed OECD BEPS Action Plan, a 15-point plan to ensure taxable profits are allocated where actual business activity occurs.

“This OECD Action Plan could be improved, but it is heading in the right direction,” John Evans, general secretary of the Trade Union Advisory Committee to the OECD (TUAC) said. “Pension funds are long term asset owners, they should raise their voice to support, not weaken this global tax agenda”.

Meanwhile the investors attending the Fiduciary Investors Symposium at Harvard University, along with representatives of The World Bank, the United-Nations backed PRI and the ITUC, sent a letter to the G20 host, Prime Minister Tony Abbott of Australia asking the G20 leaders to consider reform and regulation that and encourages long-term investing.

To see the letter click here – G20 letter

Institutional investors are clearly attracted to private equity, but remain wary of the sector for its perceived lack of transparency and ability to be measured, high fees and a sense that they cannot invest into the sector as truly equal partners.

“It’s clear that now is a time with a lot of flux in private equity,” said Josh Lerner, the Jacob H Schiff Professor of Investment Banking and head of the entrepreneurial management unit of Harvard Business School.

“On the one hand we can see that certainly institutions want private equity in their portfolio…for the return characteristics, and so forth.

“But at the same time it’s also clear that there is some unhappiness, not so much with private equity per se, but with private equity funds.”

One issue, Lerner told the Fiduciary Investors Symposium at Harvard University, is that the fees charged by private equity managers really haven’t declined even after the global financial crisis.

“One might think given the wrenching changes that happened with the financial crisis they would have seen dramatic adjustments taking place. But when you look at for instance the movement in management fees, yes it has come down, but I guess to describe it as evolutionary would be kind. It’s been glacial in terms of the speed of adjustment.

“One can see why there is this degree of unhappiness [in] many corners of the limited partner community, which has manifested itself in, for example, interest in separate accounts.”

Disquiet

There’s also disquiet about how the returns to limited partners compare to returns to general partners when co-investing.

“We did a project recently where we looked at seven of the largest global limited partners who’d played in the co-investment game for a decade or longer; where they shared their data with us on a confidential basis,” Lerner said.

“I’ll just highlight one remarkable fact, which has to do with the cornerstone of most institutions’ direct investment programs, which is the co-investments. In particular we looked at these guys, who were all sophisticated…and had been doing it a long time, and what we found if you compared their returns on a net basis…with the returns of the same funds they were co-investing with, again on a net basis, [was that] much to our amazement…the co-investments underperformed the funds they were co-investing with – not on a trivial basis, but by 8 per cent a year, which to us was really, really shocking.

“Initially we thought we must have mis-programmed the computer…but unfortunately the computer was right.”

Lerner said one of the issues that emerged was that “these tended to be the largest deals that the funds were doing”.

“For whatever reason it seems our smart, sophisticated LPs sauntered into a bunch of deals that were really in some sense the worst that [were on offer],” Lerner said.

“The question is, is there really going to be a cure that addresses these things?”

Important

Mark Szigety, vice president of risk and quantitative analysis for Harvard Management Company, said private equity is important to HMC and represents “a large portion of our assets”.

“From my perspective there are two main areas of concern,” Szigety said.

“The first is in risk management. We spend a lot of time trying to understand the underlying factors that are driving the returns of private equity.

“We also look at issue related to cash flow modeling. This is a major concern of ours as well. Harvard had a difficult time during the [financial] crisis in terms of its liquidity needs. That was enterprise-wide and not just centred in private equity, but the idea of making sure we understand and have a better sense of how cash flows and NAV evolves over time is important to us in terms of making sure our liquidity is where it needs to be.”

Szigety said HMC also has concerns around asset allocation and benchmarking.

“We have thought about [benchmarking] extensively and we are not, I don’t think, happy with any option that has presented to us. Again, a concern for us is how we think about benchmarking our managers, and the asset class.”

Will Kinlaw, a senior managing director and head of portfolio and risk management research for State Street, agreed that benchmarking is an issue for private equity investors, not only for the asset class, but at a manager level.

Index

“One of the things we’re hearing more and more is we don’t just want an index at an aggregate level that tells us what the median manager is doing,” Kinlaw said.

“Another challenge is clearly portfolio construction, and that’s both at the asset allocation level but also within the asset class.”

Kinlaw said another issue was understanding factor exposures and risk exposures of private equity.

“Some of the work we’ve been doing there has been related to, particularly, the sector exposures that private equity managers are making.

“Another challenge big institutions seem to be having is they’re not able to maintain or reach the target allocation they have for private equity.

“They’re looking for, I wouldn’t say a replication because it’s impossible to replicate private equity in the public market, but ways to get a little bit closer along sector lines and factor lines in the public market as a tool, as a place to park some of the capital that’s earmarked for future private equity investment.”

At the end of a corporate review process that lasted eight months, involved 23 meetings of a steering committee and produced 60 working papers, the UK railways pension fund Railpen was left with 422 action items.

“We’ve done 224 of them,” Chris Hitchen, Railpen chief executive, told the Fiduciary Investors Symposium (FIS) at Harvard University.

“And I’ve got 74 to do before I go home for Christmas.”

The transformation embarked upon by Railpen to modernise its corporate structure, its remuneration structure and its investment processes “really was a soup-to-nuts change”, Hitchen said.

Railpen called on Roger Urwin, head of global content for Towers Watson to help define and then implement a change program.

“We together constructed this process,” Hitchen said. “We’re only part of the way through it. I wouldn’t say we are a finished item at all here, but we’re well on the way.

“We spent a surprising amount of time on [defining] why are we doing this? What are the mission and role of the organisation, revisiting our values and beliefs. That’s really, really important, so you get a common understanding of what it is we’re here for, a common sense of purpose.

Enablers

“We spent quite a bit of time on the ‘enablers’: setting up the right governance processes, and thinking through what are the right competitive elements for your scheme, how can you go about solving the investment challenge.

“We now have an investment board which is majority externals to the trustee. My trustee is a representational board. We haven’t gone quite as far as Ontario Teachers, with their indirect representation, but we do now have independent experts in control of the governance. And they are as important in encouraging my team and introducing ideas as they are in judging what we produce.”

Hitchen said he was struck by remarks made at FIS by Randy Cohen, a senior lecturer at MIT Sloan School of Management, about “deconstructing alpha into its hidden betas”.

That’s really how we’re trying to construct our manager relationships going forward,” Hitchen said.

Railpen is a $30 billion scheme covering employees in the UK industry, which was nationalised in 1946 and denationalised again in 1994.

“That’s how we ended up with an industry-wide scheme,” Hitchen said.

“My scheme, because of its history, is sectionalised. We pool the assets but the liabilities are in different sections. I’m kind of 110 plans stuck together, in that sense.”

Esoteric

Hitchen said that over time the Railpen scheme had become more and more complex, with various functions outsourced and “more and more managers seeking more and more esoteric ways of adding value”, and had reached the limits of its corporate structure.

“It became apparent that the world had been changing faster on the outside – that Jack Welch thing – than we were on the inside…and we needed to do something else,” Hitchen said.

Tower Watson’s Urwin said that transformation change is always difficult, but Railpen had been committed from the outset to think differently, and to see it through.

He said Railpen had moved away from the traditional pay-for-performance structure, because these so-called “eat what you kill” approaches, while “superficially quite appealing, are culturally quite bad, because they produce a focus on short-term performance, they generate selfish behaviours too often, and they reinforce culture where blame happens too easily”.

“What I speak about here is the rejection of the eat-what-you-kill principle,” Urwin said.

“The process that Rail led here on the compensation review was a process that led to something that I call an eat-what-you-grow alternative.

“The design of that comp was based on a three-year bonus for the value-add that individuals had contributed to the team, but then deferred three years while it grows with the fund. So it’s a six-year deal, in two parts. Good rewards for good stewards.”

Marshalling

Urwin said the key to effective organisational chance was “about marshalling and motivating the teams; it’s about organisational design in particular, managing stakeholders and getting everyone to connect to this fast-changing landscape”.

“Governance has come a very long way in the last decade or two but it has a very long way still to go,” he said.

“My journey has been several years on this, working with a bunch of very large funds. I started out downunder, working on the New Zealand Super Fund, the Future Fund [in Australia] – the new kids on the block had the advantage of being fresh – and then trekked thought Abu Dhabi with ADIA, spent some time in California with CalPERS, and latterly some time with Railpen.”

Urwin said each of the funds he’s worked with has brought some original thinking to the issue of corporate change, but in each case, success has been down to the fact that the fund has been prepared to be adaptable.

“We know that change hurts, and big change hurts big,” Urwin said.

“But without change there is really no progress.

“The key dimension here is that transformational change is about far-reaching movement in structure, people and process, and the focus of an organisation and its ability to adapt. Better decisions equals better performance down the track, with a lag.

“Railpen was very ambitious to cover all the bases in this change process. Anything was possible.

“Really, transformational change is not that popular for the obvious reasons hat it’s a big time and energy commitment. And the risk is that it doesn’t live up to expectations.

“But to Railpen’s credit they took those risks on, and they’ve lived to tell the story.”

Introducing a “foreign language shield” into a decision-making process is a proven way of making better decisions, according to Cass Sunstein, the Robert Walmsey University Professor at Harvard Law School.

Sunstein, a former administrator of the White House Office of Information and Regulatory Affairs (OIRA), told the Fiduciary Investors Symposium (FIS) at Harvard University that the Obama administration had introduced a rigorous cost/benefit analysis of any and all proposed regulatory changes, and this had acted as an effective “foreign-language shield” that improved the impact of new regulations.

“If you’re an adviser, get the cost/benefit figures, the risk/return figures, the algorithms, up and running. It’s a great safeguard,” he said.

The term “foreign language shield” comes from the behavioural finance finding that speaking a foreign language has been shown to turn off the part of the brain that makes quick, intuitive and generally error-prone decisions.

Sunstein said that behavioural economics holds that two systems operate within the brain: system one, and system two. System one governs rapid, intuitive and relatively error-prone decisions; while system two is more analytical, cooler and more rational.

Sunstein said system one leads people to think that “if there’s Ebola in New York we’re in big, big trouble”, while system two is the part of the brain that says “more people have married Kardashians than have died from Ebola”.

Evaporate

“A number of the biases that people show – including, by the way, loss-aversion, and there’s new data suggesting present bias – evaporate when people are answering questions in a foreign language,” Sunstein said.

“Now, it shouldn’t be that when you’re in a foreign language you lose your capacity for error. It should be that would be increased. But the reason is when you’re in a foreign language, your intuitions, your quick intuitive reactions, are disabled. You’re working really hard.

“So if you hear a speech in a foreign language, when the speaker makes a joke, it’s never funny. To find something funny, your intuition needs to be working.”

The demand for rigorous cost/benefit analysis is “in President Obama’s 2011 Executive Order, which says you have to quantify everything and make sure the benefits justify the cost”.

“I found this was a fantastic safeguard – sometimes resisted, and not always in the regulatory areas I imagine that you work with, honoured – but extremely helpful,” he said.

“So if you have a regulation that’s designed to promote – let’s take it outside the financial area – environmental quality or safety on the highways, and it costs hundreds of millions, which on the regulatory side is not trivial, or billions, which on the regulatory side is a big number…then the fact that an interest group wants it, or there’s a professional within government who thinks it’s an important safeguard, or the fact that there’s some theory that regulators hold that suggest it’s a good idea, or if there’s some noise in Congress suggesting [it] should be done, we have a built-in foreign-language-type shield, which I try to use all the time, and say, that’s not going to increase benefits for people, so even $100 million expenditure isn’t justified.”

Sunstein said OIRA had veto power, subject to the President’s override.

“So if it says no…that’s the end of it, really, unless the President comes in,” Sunstein said.

“And he’s a pretty busy guy.”

Sunstein said a delegate at FIS had outlined to him “new ways of building risk-management strategies that are more forward-looking and capacious than existing ones”.

Steroids

“And that’s system 2 on steroids,” Sunstein said. Such techniques should be used “not to figure out how to justify what ether the adviser or the client wants to do, but to figure out what they should want to do”, he said.

“The goal of the technique or the technology is to say [for example], this is what you want to do if you want to maximise returns,” he said.

“One way to see cost/benefit analysis is like a rhetorical tool that gets people to frame in a maximally persuasive way an argument to which they are antecedently committed. I don’t see it that way.

“I see it as away of figuring out what you should do. Just like a risk management technology that informs investors, so cost/benefit machinery helps government figure out what it should do.

“If you’re trying to figure out what the right rule is for mercury as it’s emitted from powerplants, how could you possibly know what you wanted to do with that rule without having a concrete sense of the costs of the mercury regulation and the – monetised to the extent that you can – benefits of the mercury regulation.

“So for mercury if it costs $4 billion, what are you going to get for that? Maybe you’ll get 200 lives saved. The government’s standard number for the value of a…life is $9 million, so that’s not a clear winner. But if you’re getting 5000 lives saved, it’s looking great.”

The modern responsibilities of the fiduciary investor extend beyond what are perceived as the “mainstream” investment issues to those related to environment, society and governance (ESG) factors. But there is a growing understanding among fiduciaries that ESG considerations are now equally important in discharging their obligations.

David Wood, adjunct lecturer in public policy and director of the Initiative for Responsible Investment (IRI) at Harvard University’s Hauser Institute for Civil Society, told the Fiduciary Investors Symposium (FIS) at Harvard University that fiduciary duty has historically evolved in-line with the changing investments of funds.

“Examples people always give is they say, well, back in the day a pension fund could only be in bonds; then we opened up to the stockmarket; then we went into alternatives; and fiduciary duty evolved to respond to the changing nature of the market,” Wood said.

“But I think the discussion has changed a little bit, and I think when people talk about the evolution of fiduciary responsibility now, Cambridge University Press has a 1000-page book that’s just on the evolution of fiduciary responsibility and [the evolution] is very much linked to three things”.

Makers of markets

“The first, and this is something that Jaap [van Dam, managing director of strategy for PGGM] said yesterday, and the panel session [on developing a communiqué to the G20 Leaders’ Summit], is the idea that investors should be makers of markets rather then takers of prices. There’s some sense that the era of fiduciary capitalism requires a different role for investors. In fact this is the topic that John Rogers, who used to run the CFA Institute, has just been publishing about.

“Second, I would say that people are linking this to a broader set of contexts in which you evaluate your investment – beyond volatility and price, looking at large environmental and social macro-trends…and especially climate risk has been a big driver of this discussion.

“And then finally – and this is something that Abdallah [Nauphal, chief executive and chief investment officer of Insight Investment] said this morning – is there’s a changing perception of the social role of investors in the world, and that post-financial crisis the way beneficiaries view funds, the way society views funds has changed, and fiduciary responsibility may adapt to that.”

Wood said that within these “big macro contexts” investors have to respond to what they have to do with their portfolios, to adapt to this new way of looking at the world.

Chris Davis, director of investor programs at Ceres, said that “ESG issues such as climate change and other environmental and social variables…have traditionally been considered extra-financial risks”.

Extra-curricular

“That kind of implies they don’t matter financially, that they’ve social issues or somehow extra-curricular to the serious business of investing,” he said.

“But I think this is no longer true. The world is changing and economies are changing and things are becoming more complicated and life is becoming more risky. ESG failures and incidences can destroy value.

“We define sustainable investing as investing that meets the needs of current beneficiaries, without compromising the ability of the fund to meet the needs of future beneficiaries – sustaining the fund’s ability to sustain returns and meet its multi-generational obligations by taking a longer-term perspective and looking at a wider spectrum of risks and opportunities.”

Davis said this demands that fiduciaries adapt and consider a wider range of factors as the world changes and new risks emerge to confront companies and markets and economies.

“The International Energy Agency has said that in order to limit climate change to 2 degrees Celsius of average warming – which is thought by many to be the threshold between acceptable impacts and impacts that are very hard to manage – will require $1 trillion of additional investment a year, globally on average, between now and 2050,” he said.

“So there’s a huge need to invest in these solutions. That demand for capital is going to create huge economic opportunity in terms of new technologies and new strategies.

Full suite

“How could you be a prudent fiduciary and ignore variables that affect the performance of businesses and the performance of investments? You need to take into account the full suite of relevant information on both the risk and the opportunity side. The solutions to some of these issues – governmental policy responses – are going to create great opportunities.”

Anne-Marie Fink, chief investment officer of the Rhode Island Employees’ Retirement System, said factoring in ESG issues “is a huge challenge”.

“It certainly is an issue and there are concerns, and we do want to watch what’s going on in terms of the longer-term sustainability of investments,” she said.

Fink said the Rhode Island system has more retirees and inactive members in it than active members, and at the current rate of drawdowns the system has a life expectancy of about 13 years.

“It does mean there is a finite period of time we need to think about, and for me fiduciary responsibility is first and foremost generating returns for our pension participants,” she said.

“Most of these issues are things that will play out over the longer term, whereas return expectations, us getting evaluated relative to other states, et cetera, it’s probably shorter-term timeframe. That being said, though, we do want to know what the managers are doing, and do believe very much in sustainability in terms of performance.”

Good versus evil

Brian Clarke, an executive director of IFM Investors, said it was a mistake to think that incorporating ESG factors in to the duties of fiduciaries came down to a “good versus evil conversation”.

“It is not a good versus evil conversation with us at all,” he said.

“It is good management. It is making more money. It posits a very simple equation: if you don’t pour oil in the back of your yard, and you don’t then end up having to clean it [and so on], you’ve going to make more money.

“If you play out all the ESG considerations and implement that across your portfolio, in a fundamental way you’re going to make more profit. When I say ‘in a fundamental way’, it truly has to be an embedded concept.

“We started this process 10-plus years ago, thinking about the conflict between fiduciary responsibility and the desire to have good ESG policies. And over 10 years we’ve come to understand that they are one and the same, first and foremost; and that it’s not about having an ESG policy that stands alone, it’s about having thoughtful ESG considerations in everything you do.”

Clarke says every one of IFM’s investment directors must ask potential target companies about ESG issues upfront.

“It’s part of the DNA of a deal team,” he says. “And then that has to be embedded in how we manage it.”

Clarke says IFM decided to work with one of its investee companies – a water supply business in the UK – to try to cut its carbon footprint by 50 per cent in a year. The project involved all employers, contractors and suppliers to the business, and it hit its target.

“The playout beyond the carbon reduction was the efficiency factor of the company dramatically jumped up,” he said.

“The cost associated with the operation of the company dramatically reduced. EBITDA dramatically increased. Revenue and profitability of the company was significantly enhanced.

“You don’t have to be a rocket scientist to figure it out.”

This article was edited on October 31 to update the name of the Hauser Centre for Nonprofit Organizations to the Hauser Centre For Civil Society, a change of name that took place on July 10 2014.

As the focus of retirees shifts ever-further towards objectives-based outcomes, those entrusted with achieving those objectives will have to rethink a traditional approach to managing money involving risk and return trade-offs.

Speaking at the Fiduciary Investors Symposium (FIS) at Harvard University, Abdallah Nauphal, chief executive and chief investment officer of Insight Investment, a BNY Mellon Company, said investors need to understand the fundamental difference between risk, as traditionally measured, and uncertainty, which cannot be measured, but which will come squarely into the picture as new solutions are developed to satisfy for retirees’ changing demand.

“The same way that the industry has shifted from peer benchmarking 60 or 70 years ago – and with peer benchmarking, by the way, the only dimension that mattered was return, because the law of survival was to beat the other guy; to moving to a strategic asset allocation type of model, which has started incorporating risk into those parameters; and then the game has changed…to deliver the income that people want in the future, we need to start incorporating uncertainty alongside risk and return in delivering solutions,” Nauphal said.

Marbles

Brian Singer, head of the dynamic allocation strategies team and a partner at William Blair, told FIS that the difference between risk and uncertainty was established by the US economist Frank Knight as long ago as the 1920s. The concept could be illustrated by imagining an urn containing marbles, 40 per cent of which are red and 60 per cent are not red.

If one marble is withdrawn from the urn, the probability of selecting a red marble is 40 per cent. The probability of getting a non-red marble is 60 per cent.

“That’s fine, and that’s what we define, [what] I think of, [what] and Frank Knight refers to as risk,” Singer said.

“It’s something that’s out there and is unknown, but the probability is something you can wrap your head around. You can assess the probability.

“Now, in that urn there are non-red marbles. I haven’t told you what they are, but now I tell you some are black and some are yellow. But I’m not going to tell you what the proportion of yellow and black marbles are.

“Now I ask you to draw a marble from the urn, and I ask you what the probability is that you will get a yellow marble. You have no way of really assessing the probability of getting one of those. It’s not 40 per cent or 60 per cent; it is unknowable.

“That unknowable is what we refer to as uncertainty, or what Frank Knight characterised as uncertainty. And there is a very big difference between risk and uncertainty.”

Significant question

Nauphal said the incorporation of uncertainty into the investment picture poses a significant question to investors.

“Can we starting thinking about investment in a different way that we have in the past?” he said.

“Can we forecast anything about the future?”

“Every evidence I see, every study that I know, shows you that we’re not much better than the Babylonian priest in terms of the records of forecasting the future. [the record] is roughly about random – actually slightly below random – and given overwhelming evidence of our inability to forecast, why do we still rely on them?”

Nauphal said that “academia has to share a portion of the blame for this”.

“It sounds like blasphemy saying that, in these hallowed halls of academia, but nevertheless, in their search for turning economics and finance into a hard science, people have tended to assume away the most important thing about the future, which is uncertainty,” he said.

Risk and uncertainty

“There are different kinds of unknown when it comes to the future. I’d rather not quote Donald Rumsfeld but Frank Knight when I talk about it – the unknowns can be divided into two things: risk, and uncertainty.

“Risk is what Frank Knight defined about 100 years ago; this is the randomness that can be captured by some form or probability distribution – the stuff that we know. And then there is uncertainty, which is the stuff that doesn’t lend itself to that kind [of measurement], where we don’t even know if there is a probability distribution for it, and so forth.

“And the question is: what is the dominant unknown of the future? Is it uncertainty, or risk? I will tell you: the longer the timeframe, the more it is the uncertainty that dominates, and not risk.

“So there is a big question here: can we start incorporating uncertainty in anything that we plan to do. That’s the real challenges facing us. There’s a lot of them, but that’s a fundamental one as far as I can tell.”

Nauphal said that if the industry cannot “start creating far better linkages between investors and the outcomes they need then “let’s at least admit that”.

“Let’s put big disclaimers and instead of pretending, just start to re-earn some of the trust that we lost to clients with products that do not deliver at all what their expectations are,” he said.

Nauphal said that funds cannot continue to perpetuate “the pretence that by mixing a couple of asset classes you can create an efficient frontier and choose a point along there that gives you a solution”.

“This is has been the way we have built a solution until now,” he said.

“There is nothing wrong with the models on the efficient frontier side, but there’s a lot of problems on the other side: how do you know what the risk/return correlation and volatility and all of this are gong to be going forward? That’s always been one of my bugbears – when people ask me what’s the long-term future look on this asset class, I have not a clue. I don’t know how others do.”

Singer said he would argue that “we’re really hitting an ‘old normal’ now, and this old normal is one that’s derived from some unique elements of demographics, regulation and geopolitics”.

“Those things cause us really to have to engage with the world in a way that’s different from what we’re used to,” he said.

“Volatility is something that happened in the past. It is the single observation of an infinite number of observations that could occur in the past. And you can calculate some volatility based on that.

“As we look to the future we think about risk and uncertainty, and they are very different things.”