On the back of a continuing shift in corporate pension plans away from defined benefit to defined contribution, Northwestern University’s Joshua Rauh and Indiana University’s Irina Stefanescu look at what causes the resultant freezing of these corporate plans.
The paper takes the further step of looking at the consequences for both employees and plan sponsors, investigating if the freeze results in savings to the companies as well as the impact on retirement-savings outcomes.
To read The Freezing of Corporate Pension Plans: Causes and Consequences, visit the Rotman School of Management’s International Centre for Pension Management.
US public-pension funds significantly underperform their global peers in real-estate portfolios due to a propensity to manage the assets externally, according to a new ICPM-sponsored research paper by three Maastricht University academics.
Value added from funds management in private markets: an examination of pension fund investments in real estate looks at real-estate investing among the 880 pension funds on the CEM database from 1990 to 2009. On average the allocation to real estate was 5.5 per cent, but fluctuates over time.
The paper by Aleksandar Andonov, Nils Kik and Piet Eichholtz examined the funds’ approach to investing in the asset class, costs and performance.
The paper found that US funds, both small and large, underperformed their self-reported benchmark by a whopping 127 basis points per year. Furthermore, their costs were twice as high as their global peers.
“I would be asking how it is possible that you do this and you keep on doing this,” Eichholtz says.
“This paper found that a fund’s approach, size and geography determine the cost and performance in real estate. You can’t choose to be a US or non-US fund, but you can learn from your peers.”
The paper found that while large pension funds overall are more likely to invest in real estate, they invest internally and have lower costs. They also have some exposure through real-estate-investment trusts (REITs) and few fund-of-fund investments.
Smaller funds are less likely to invest in real estate and more likely to invest in funds of funds.
Eichholtz said with regard to costs, the biggest driver is the approach decision, how a fund invests from internal management to funds of funds.
He said geographically there were some interesting results: US funds were more likely to invest externally, regardless of their size, and pay higher fees.
“It’s as if the real-estate-investment management industry in the US is able to charge higher fees,” he says. “The costs don’t lie in the pension funds but in the service industry, and in the US it is tens of basis points more. US funds pay far more for external managers and are more likely to retain managers. It’s double crazy.”
Eichholtz describes funds of funds as “way beyond expensive” and believes smaller funds would be better off getting real-estate exposure through REITs than funds of funds.
Another finding of the paper was that the more expensive the strategy, the worse the performance.
Internal management was the best performer across the board, both before and after fees. At the same time, Eichholtz says, funds of funds “destroy value in two ways” through costs and picking the wrong investments.
He has some practical advice stemming from the results of the paper: if a fund is big enough, it pays to manage real estate internally.
“There is a lot of low-hanging fruit, funds that are big enough and could go internal, especially in the US.”
If you’re small, he says, avoid funds of funds and invest in REITs, and if you don’t want listed exposure then he proposes investing in a syndicate.
An example of this is in The Netherlands, where there are three large real-estate funds established by pension funds, Amvest, Aldera and Vesteta, the latter started by ABP and now open to a large group of investors.
They key, Eichholtz says, is that the management organisation is owned by the shareholders of the fund (that is, the pension funds) so there is no conflict of interest.
“The owner pays the salaries. There is a 30-basis-point fee, no bonuses or incentives.”
Access Value added from funds management in private markets: an examination of pension fund investments in real estate here.
The Rotman International Centre for Pension Management (ICPM) has approved five research projects for funding this year, including a behavioural-finance project by Swedish academics, to investigate plan members’ views of the “extended” fiduciary duty of pension funds.
This project, to be conducted by Joakim Sandberg, Anders Biel and Magnus Jansson from the University of Gothenburg and Tommy Garling from Stockholm University, will develop and test a socio-pyschological model to explain differences in beneficiaries’ attitudes toward an extended fiduciary duty, including social and environmental issues.
Titled Attitudes toward extended fiduciary duty among beneficiaries of pension funds, it aims to help fund trustees gain a better understanding of their beneficiaries’ expectations with respect to fiduciary duty and environmental, social and governance (ESG) investment.
Chair of ICPM’s research committee and head of innovation at APG, Stefan Lundbergh, says this article is interesting because it looks a the issue from the beneficiaries’ perspective.
“As an industry we assume ESG is important, but we haven’t asked the member,” he says.
“This paper on fiduciary responsibility is interesting because it is a different type of research [that] we haven’t done before. Typically, we’ve done quant papers but this looks at behaviour and what drives people. Fiduciary duty has to be solved first. If you don’t solve this, then you can’t solve anything else.”
Lundbergh says the mission of ICPM is to drive knowledge and understanding as well as build an academic presence.
Since its inception in 1995, the organisation has funded more than 20 research projects across pension and governance design, investment beliefs and risk management.
Selected researchers are funded over a two-year period and usually invited to present their findings at ICPM discussion forums, and to write for the @@italics Rotman International Journal of Pension Management @@.
ICPM, which is chaired by chief investment strategist at CPPIB, Don Raymond, and has Keith Ambachtsheer as its president, held its annual June forum in Toronto this week.
The ICPM is supported by about 40 global research partners, which each make a financial commitment to support research, the organisation and execution of the twice-yearly discussion forums, the next of which is in London in October.
Other papers that were given funding for 2012–2013 include Pension fund asset allocation and liability discount rates: camouflage and reckless risk-taking by US public plans? by Aleksandar Andonov and Rob Bauer (who is also associate director of programs at ICPM) from Maastricht University, and Martijn Cremers from Yale School of Management.
Other papers published by ICPM can be viewed here.
please put a link to the past papers of ICPM
With hundreds of indexes, portfolio and risk analytics, and a growing emerging-markets and environmental, social and governance (ESG) focus, MSCI is a business in constant evolution, but chief executive and chairman, Henry Fernandez, says institutional investors are demanding further development, such as private-equity indexes.
Fernandez has been chief executive of MSCI since 1996, when the company’s revenue was $9 million. Last year it had $900 million in revenue and employed 2500 staff in 20 countries. The firm has grown organically and through acquisition, and Fernandez says he is on the lookout for suitable companies once more.
The last acquisition saw RiskMetrics assimilated into the MSCI fold within nine months of purchase, and each part of that business is now performing well, he says.
He admits he was perhaps too quick to call Institutional Shareholder Services (ISS), the proxy-voting firm that formed part of RiskMetrics’ stable, a “non-core” business.
“The risk business is why we bought the company. I had been pursuing them for five years and a year into the pursuit they bought ISS, and Morgan Stanley owned MSCI,” he says. “When two years ago I bought RiskMetrics, maybe I was too quick to say ISS is non-core and implying it would be sold.”
Now he says the proxy-voting business and a product that checks companies on non-financial factors could be huge successes.
Proof of that is MSCI’s ESG business, an offshoot of the ISS business, which has doubled in the past two years.
“It is a business with a lot of potential,” he says.
Last summer MSCI also launched an executive-compensation data-analytics offshoot of ISS.
“We looked at data in-house but didn’t make it available. It’s been a home run, especially from the issuers, the companies themselves. We’ve done that in the US, and will extend to all countries in Europe and eventually Asia,” he says.
The next cab off the rank in the ESG business will be the rating of sovereign debt on those criteria.
“We’re very brave,” he says.
While typically MSCI has had an equities focus, the recent relationship formed with Barclays to form an ESG fixed-income index is an example of the company looking to expand into other asset classes as investors and other clients demand.
“I have a sense that fixed income will grow a little bit organically or some by sort of acquisition,” he says.
“Institutional investors, asset owners, are extremely interested in creating transparency so their decisions are clear about what they’re buying – the purpose, benefit and measurement of that. We’re in the business of providing that transparency. We provide clarity. They want us to advance the state of the art in what we do. They want us to go in areas we’re not in yet, like private-equity indexes, risk models and fixed-income portfolio management.”
Tooling up
Fernandez says MSCI is very focused on creating the tools that help people make investment decisions.
“The broader investment industry attracts a lot of very smart people. We’ve found it attracts talent but the tools to help them navigate are not efficient. We are very focused on creating and maintaining and enhancing and investing in those decision-making tools,” he says.
“We are not in the business of indices per se, or data per se; they are a means to an end.
For example, an index is a performance tool for us, not just an index. The way we build our tools is we look at investment problems then at how to build the tools to fix the problem. It comes of out research.”
An example of that, he says, is the evolution of small caps as a global asset class.
“In the world of high correlations, people want ways to diversify. We make it more transparent,” he says.
The company continues to focus on equity investments as one of its core competencies, with an emphasis on providing equity-portfolio managers the tools they need including performance tools, by way of indexes, performance attribution, in Barra, portfolio construction, market-impact models and the ability to invest according to Sharia compliance or ESG.
But it also continues to evolve into other areas, such as multi-asset-class portfolio analytics, strategy indexes such as volatility or risk premium.
“For a long time indices were about slicing and dicing with market beta, what’s now happening is an evolution in the index world; it’s strategy beta.”
This evolution includes equities long/short, merger arbitrage, momentum (such as fundamental weighted indexes) and will change according to market cycles, for example, inflation-protected equities indexes are on the horizon.
EDHEC-Risk Institute has released a study highlighting the need to reform retirement systems and pension funds.
The study Shifting Towards Hybrid Pension Systems: A European Perspective also looks at the need to adopt professional management structures and to considerably improve the product offering of defined-contribution funds.
To read the paper click here