2014: the year in words

In 2014 we have delivered to our readers more than 200 in-depth investor profiles, analytical and research-driven stories on the global institutional investment universe.  The most popular investment stories have been about private equity, ESG integration and how to find the ever-elusive alpha. But asset owners have also liked stories on how to improve their internal structures, decision making and team cultures. Below is a recap of the 10 most popular stories for 2014.

Data doesn’t lie: illiquidity premium doesn’t exist

There is no 3 per cent illiquidity premium in private equity, according to research by CEM Benchmarking.

A cost drag on private assets cancels out the returns of investing in private equity and real estate for those investors that outsource to external providers, the research finds.  read more

 

Good for Harvard, good for the world: Why HMC embraced ESG with a passion

Harvard Management Corporation (HMC) signed up to the UN-supported Principles for Responsible Investment (PRI) less than a year ago, but the company that manages the $36 billion Harvard University endowment is already moving rapidly to build environmental, social and governance (ESG) factors into every investment decision it makes.

Jane Mendillo, president and chief executive of HMC, told the Fiduciary Investors Symposium at Harvard University that its embrace of ESG factors and the PRI was driven by the changing definition of what it means to be a fiduciary investor, and by a conviction that investing sustainably will improve its portfolio returns. read more

 

Howard Marks on alpha and making money

“It used to be easier to make money,” Oaktree Capital Management founder and chairman, Howard Marks muses as he discusses meeting the demands and goals of his clients in 2014.

Marks is an avid communicator, and has been writing memos to clients for 24 years. The result is his book “The Most Important Thing”, which Warren Buffett’s review on the front cover summarises as “…that rarity, a useful book”.

His January memo is a 4,000-word musing on the role of luck. In it he discusses many things including “alpha” which he defines as superior personal skill.

“It used to be easier to make money. If you look at the history of inefficiency, there were markets that people didn’t have access to, there was infrastructure that was lacking and investments that were unknown. Now everyone knows everything about everything,” he says. read more

 

Mercer’s plan for integrating ESG

How to implement ESG into portfolio construction and implementation is an ongoing challenge for asset owners. Mercer has come up with a number of strategies including the best way to use ESG ratings, active ownership, and tailored strategies that play to sustainability themes, including its own unlisted investment solution. Amanda White spoke to Jane Ambachtsheer, global leader of responsible investment and Nick White, global director of portfolio construction research. read more

 

Is in-house management the future for large asset owners?

The allure of potentially higher net returns from portfolios precisely tailored to values, beliefs and risk appetite is hard for any asset owner to ignore, yet needs to be balanced against the many challenges associated with managing assets in-house.

To this end, it is worth outlining the key benefits that in-house asset management can offer. Several academic studies (see note 1) have shown that funds with more internal management (as a proportion of total assets) have achieved improved net returns, largely due to a significantly reduced cost-base.  According to the research, this does not just apply to the more esoteric realms of private equity; these cost savings can be seen across more traditional asset classes too. In an industry where most outcomes are uncertain, any reduction in costs is compelling. read more

 

Challenges facing the world’s biggest funds

In the coming weeks, Towers Watson will be writing a series of articles, exclusive to conexust1f.flywheelstaging.com, that look at key challenges facing large asset owners. These will focus on specific practicalities that many global funds are encountering such as the role of internal teams.

To put these challenges in context, this first article by global head of content, Roger Urwin, explores six overarching issues that Towers Watson believe will shape the investment landscape for the world’s large asset owners in the coming years. read more

 

UPS pension fund’s opportunistic future

The United Parcel Service corporate pension fund is finalising an asset liability study this year which will result in a new strategic asset allocation.

The $28 billion US fund, typically has a lower allocation to fixed income than its peers and has a reasonably aggressive portfolio for a corporate defined benefit fund.

It is a young, open plan with a low payout ratio at around 3.3 per cent. It means the investment allocations can be more innovative than a de-risking mature defined benefit fund, and chief investment officer, Brian Pellegrino, and his team have been exploring new ideas to make the most of these structural opportunities. read more

 

Where does the next generation of fund managers come from?

According to Malcolm Gladwell’s Outliers, at least 10,000 hours of practice is needed to be a success at your chosen profession. This means that a fund manager will hit their strides around age 40. But the London Business School is giving its students a leg up in that quest to find success. They have real-life stockpicking responsibilities as part of the student-run investment fund.

Ever wondered where the next generation of funds managers will come from? Well the London Business School is helping to nurture this next breed of money managers.

The first European school to have a student-run investment fund, it cultivates an environment of learning by doing. Students are taught to think like funds managers and three times a year there is a competition giving students the chance to pick the fund’s next stock.

The winner doesn’t just get the glory of beating their fellow students, but the honour of having real money allocated from the Student Investment Fund. read more

 

PGGM finds out what it really means to be a long-term investor

Customised benchmarks, absolute return strategies and long-term mandates are all being considered by the PGGM executive team as it implements the new PFZW investment framework. Amanda White spoke to Ruulke Bagijn chief investment officer of private markets and Marcel Jeucken, managing director responsible investment at PGGM about what it really means to be a long-term investor.  read more

 

Merton’s message: give up on alpha

Nobel Prize winner, Robert Merton, has thrown down the gauntlet. He claims that by focusing on a retirement income goal he can beat any competitor that is managing a 70:30 portfolio that has wealth accumulation as the goal. Do you dare take him on? read more

 

And for luck, one more….

Breaking bad habits: why investors aren’t good at asset allocation

Institutional investors act like momentum investors, chasing returns, even over longer time horizons according to Asset Allocation and Bad Habits, a new research paper that looks at the impact of past returns on asset allocation.

The paper commissioned by Rotman-ICPM and authored by Amit Goyal professor at Univeriste de Lausanne, Andrew Ang professor at Columbia Business School and Antti Ilmanen from AQR Capital Management, empirically documents that longer-horizon investors act like momentum investors.

While many large pension funds rebalance there are also many that let their asset allocation drift with relative asset class performance. This might reflect passive buy and hold policies or a desire to maintain asset allocation near to market cap weights but it can also represent more pro-active return chasing. The paper gives evidence to the latter, using data from CEM Benchmarking on evolving US pension funds’ asset allocations from 1990-2011. It shows return- chasing behaviour at asset class level over multi-year horizons.  read more