Public frat-boy investors skirt high returns at members’ peril

With the skills, practices and expectations that are embedded in the private corporate sector being brought to pension management maybe we need to expect the turnover in senior investment jobs to increase, but that doesn’t mean it is a good thing for the industry.

While everyone has their own reasons for leaving a job, when a high profile investment officer moves on after what might seem a premature tenure, it prompts questions about the sustainability of the model. And the turnover of late is notable.

Increasingly, chief investment officers are stamping the ground they land on with dramatic and far-reaching reform: strategic asset allocation reviews, expensive and time-consuming reforms.

Bringing the skills, practices and expectations that are embedded in the private corporate sector to the pension industry can be beneficial. But not at the expense of long-term strategic thinking.

Outside of investments, one of the biggest problems with sustainable social reform is the short termism of politics, with leaders staying in power for two, three years, stamping their change, and seemingly lacking long-term vision. Why would they? Is the management of societies’ long-term savings at risk of being managed by those at the senior level with short-term tenures, and therefore by nature short-term vision?

Pension funds are under increasing pressure when it comes to long-term investing which is reflected in a number of trends such as the de-risking of investments following the crisis.

Sponsored Content

In an article for the Rotman International Journal of Pension Management, head of the Rotman School of Management, Roger Martin, says “admonishing CEOs (and investors) to ignore the expectations market is about as effective as admonishing frat boys to stop chasing girls”.

In addition to the pressure defined-benefit funds have of meeting liabilities, a defined-contribution structure creates its own short-term pressures, with peer comparison a favourite past-time.

But aligning the long-term nature of pension investing with vision is important for a number of reasons.

Importantly the investment pools are long-term. From the beneficiaries’ point of view their money could be entrusted to a fiduciary for 30 years or more.

From a return point of view, long-term investing allows access to structural risk premiums, such as liquidity risk, as well as long-term macroeconomic trends, encourages good corporate behaviour, and the avoidance of behavioural and transactional costs.

There are also the more feel-good aspects such as the role in nation building via investing in infrastructure, and the integral and unique opportunity fiduciaries have in the development of a low-carbon economy.

A recent World Economic Forum paper on the future of long-term investing found the constraints on long-term investors were the key driver of how much long-term capital was available to invest.

These constraints included an institution’s liability profile, investment beliefs, risk appetite and decision-making structure. CIO turnover, and why that happens, should be part of the discussion when it comes to decision making.

Much has been written recently on investment compensation schemes within pension funds, including Keith Ambachtsheer’s “How Should Pension Funds Pay Their Own People?”

But it is not just compensation that motivates senior executives in any business, and perhaps funds need to focus on these broader set of non-monetary personal, institutional and social goals.

Good talent will be frustrated by a job that doesn’t allow autonomy, control (for example is the CIO the implementer or the decision-maker), personal and career development, and reward in other forms such as peer recognition, and, perhaps, the wider good.

How this industry, and individual pension funds manage the balance between attracting senior minds from the corporate sector, and then keeping them, will be a challenge.

Leave a Comment

Sort content by

Boon for managers as Korean NPS to outsource billions

The National Pension Service of Korea will outsource 26 trillion Korean won – the equivalent of $23 billion – to external funds managers this year as it moves towards its 2015 strategic asset allocation which will see a dramatic increase in equities and alternatives.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

CalPERS warns that Apple tempts downfall

One of the world’s most innovative and progressive companies, Apple, is the target of lobbying by CalPERS, demonstrating that dropping mandatory majority voting in director elections from the final version of the Dodd-Frank Act, hasn’t deterred shareowners from taking the matter into their own hands.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Let’s work together quickly: Stronger Super chair

The time for ideological argument was over, said the chair of the Stronger Super Committee, Paul Costello, and the industry should work constructively to implement the Australian Government’s response to the Cooper Review.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Pension roll-ins devilishly detailed

As evidence emerges that pension best-practice increasingly manifests in mega-funds, mergers to capitalise on the benefits of economies of scale abound. Amanda White looks behind the scenes of the roll-in of the $3.4 billion state-based Westscheme into the $37 billion AustralianSuper, and finds it’s not as glamorous as it sounds.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Wurts polishes its silver

US consulting firm Wurts & Associates turns 25 this year, so Amanda White spoke to the founder, Bill Wurts, and managing director, Jeff MacLean, about the company’s transformation and the plans for the next quarter of a century.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Capital ventures forth … cautiously

Everyone likes venture capital. It’s one of the feel-good asset types that fiduciary investors can believe makes a difference to society. Unfortunately, for the past 10 years it has also, on average, lost money.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Previous