NETHERLANDS- Jean Frijns, CIO of Europe’s largest pension fund, the 146 billion Euro Heerlen-based ABP, today opened the seminar for the second annual IPE Awards with a warning to pension funds that extreme market events are becoming more frequent - resulting in greater short-term volatility and a need for longer term investment horizons.
Frijns noted that, in response, pension funds should seek to increase the robustness of their long-term investment strategies and strengthen their capacity for risk absorption in stressful times.
This, he said, should involve exploring the risk capacities of pension funds: “There is a need to expand the investment universe and to look at commodities, capped bonds or index-linked bonds, for example.”
Frijns further advocated use of more buy and hold strategies by pension funds and argued that they could also look at tactical opportunities in the buying and selling of volatility.
He added: “another area where pension funds should be more active is on corporate governance and sustainability issues for corporations. If pension funds are active on this side then it will make their investment strategy more robust.”
Frijns explained his thoughts by pointing out that pension funds today are living in a world where short-term return distributions are affected by extreme events, which are “not that rare anymore.”
“They occur once every two or three years, instead of once every 20 years, which is the way we used to think. We can expect this trend to continue due to the integrated nature of global markets today.”
The ABP chief posited two scenarios going forward. The first, he labelled the ‘stress regime.’ “This would have negative returns and be an environment where diversification doesn’t work anymore and even diversified portfolios suffer from increased volatility.”
The second, he called the ‘normal/historic’ regime. “This has low corellation, no extreme events and diversified portfolios have low volatility.
“The problem is you can’t know, ex-ante, which of these scenarios you are in.”
Frijns said he believed that if the ‘stress’ scenario characterised both short-term and long-term return distributions then there could be a “complete breakdown of all the lessons we have learned about investment.”
“There is no guarantee for short-term stability at the moment, which is why the long-term investment horizon for pension funds can no longer be five, but ten to fifteen years.”