Asset allocation game
The asset allocation game was chaired by Karel Stroobants of Akkerman Stroobants in Brussels and focused on how the imaginary ‘Easy Going’ pension fund should handle its asset allocation, on which the attendees were invited to vote.
Six asset management executives - Darrell Riley of T Rowe Price, Craig Scholl of State Street Global Advisors, Fabrice Cuchet of Dexia Asset Management, Clive Norton of Goldman Sachs Asset Management, Yves Lehmann of Sociéte Générale Corporate & Investment Banking and Raymond Haines of ABN Amro - each argued the case for different asset classes to help deal with the fund’s problems.
Riley, who advocated active equities, highlighted the different investment styles of identical twins Gary and Robert Gensler (Robert works for T Rowe Price). His presentation focused on Robert’s track record of skilfully running different portfolios, arguing that skilled analysts have access to various information sources and superior insight into industry structure and market trends. They are able to anticipate others’ moves relative to new information.
State Street’s Scholl put the case for shorting, saying that underweights add value and that shorting “significantly increases” investors’ opportunity sets.
Dexia’s Cuchet argued for hedge funds, saying the reality was somewhere between two clichéd viewpoints. The rosy view was that they were alpha generators with no risk. The black scenario was that they are high risk with unpredictable returns. The middle ground was that they are a good asset for diversification. He said: “They give exposure to specific risk factors such as volatility, spreads between mid/large caps and credit spreads that are less identifiable through investment in traditional asset classes.”
Norton, co-head of GSAM’s private equity group in Europe and Asia highlighted the advantages of the private equity model.
These included financial engineering and expertise, industry knowledge, control, long-term perspective and the alignment of interests. The key to value creation was to “identify repeatability, sustainability and adaptability”. He pointed out that annualised net returns for public equity over 1980-2004 was around 10%.
He said private equity was not just a source of alpha and there was also a premium for the illiquidity of the asset class. It also provided diversification and smoothed returns.
SG’s Lehmann explored the concept of hidden assets, which he suggested was the fuel for hedge funds. He defined the idea as areas which are usually considered sources of risk, such as volatility, correlation, dividend yield as well as credit spreads and liquidity. It was an “asset class” that has historically only been accessible to a small number of market players such as hedge funds and reinsurers.
Haines, ABN Amro’s head of UK pensions advisory argued that the commodities horse has not “already bolted. Perhaps its only caught up with the pack,” he said, noting that the market was still well below historic peaks in real terms.
He explained that investment in new capacity is lagging demand and that consolidation in the mining industry is leading to more ‘rational’ investment. And he saw a return to managed oil prices. Added to all this was the fact that commodities are a real diversifier for a portfolio.
The outcome of the game was announced at the Awards dinner in the evening, with Maria Jose Lopez Peña of Cepsa Fondo de Pensiones closest to the chairman’s choice while Filippo Battistini of Dexia Asset Management was closest to the audience choice. The prize was champagne and bottle of ‘Berlin’ perfume.