In praise of risk
“I love risk. I like it because it produces returns for me”, said ABP chief investment officer Roderick Munsters at the 5th annual Institutional Fund Management conference in Geneva.
Munsters was one of several industry heavyweights expressing views on the current and potential future challenges facing the pension fund, investment management and consultant sectors.
In a head-to-head discussion with former Hermes Pensions Management chief executive Tony Watson, Munsters told the conference that pension funds should be able to run risks and produce returns long term.
He stated that the roughly €200bn Dutch civil service fund is not in the business of making promises for next year, but rather over a longer term investment horizon of 20 to 40 years or more. He added that ABP aims to provide “attractive pensions at an attractive price, and therefore needs to make attractive returns.
“If we don’t allow risk, we don’t get returns,” Munsters said.
He and Watson also emphasised the importance of good corporate governance as a value-adding mechanism. “Corporate governance is in your own best interests as an investor. It is important to believe in it. It needs thorough thinking, and principles you are transparent about. This is not necessarily happening today, and that is a pity,” said Munsters.
According to former Philips pension fund chief executive Dick Snijders, there is room for improvement when it comes to the corporate governance of Dutch pension funds.
Speaking during an interactive discussion on the evolution in pension fund governance, Snijders said there is still too little professionalism.
“If low professionalism on the boards of many pension funds continues, wrong choices will continue to be made,” he said. He also added that the new IFRS accounting rules prohibiting funds from keeping a long-term vision was among the biggest threats facing corporate governance.
“A CFO has to preserve his balance sheet,” he said. “The most basic idea is that good governance adds value, and is not a nuisance,” he said.
In a session on ‘what are institutions going to be demanding in three to five years’ time?’, Watson Wyatt Investment Consulting European head Kevin Carter stated value for money and flexible products will be top of institutional investors’ wish lists in 2010.
According to Carter, the industry is passing “from a champagne-popping time to much more difficult spaces”. Pension fund deficits and regulatory requirements were among the issues putting pressure on institutions and were “overpowering” for trustees.
He told delegates: “Clients are not going to tolerate underperformance. Clients will be tougher on managers who can’t or won’t deliver.” He also stated that governance will determine client choices, and portfolios would have greater diversity.
He also said that a “revolution” is unfolding in the way institutions benchmark their assets – with an increasing focus on liabilities, away from regular indices.
During a high profile panel discussion on the second main day of the conference, Goldman Sachs Asset Management’s co-head of European sales Ruud Hendriks said the line between traditional pension fund consultants and investment managers could become blurred in the future.
According to Hendriks, there is a need for asset managers to also advise pension funds, rather than just fulfil a management function. He added that managers, in some instances, could give the same advice to schemes as consultants.
“We have a high regard for consultants. But, generally speaking, we see the pieces of advice consultants give and we can do this too,” he said.
“Consultants continue to play a very, very important role for trustees,” he continued. “But advice-giving is something that investment banks, for example, can do.”
He added that there will be “increased blurring between the typical consultant and typical asset manager” with investment managers providing advice and consultants managing assets.
Some fellow panellists agreed, stating that asset managers are increasingly understanding the problems affecting pension funds, and are engaging in dialogue with consultants.
“Fund managers understand what the finance director wants. If the fund manager doesn’t, then investment banks will step in,” said Martin Gilbert, chief executive at Aberdeen Asset Management.
However, Dukere Asset Management president Roberto
Falzoni, stated that asset managers should “stick to what they do” and “create value”, while advisers should “provide possibilities”.
In an earlier panel discussion, chaired by Sue Douse of Grail Partners, it emerged that investment managers could face increasing competition from multi-managers, and come under greater pressure to provide multi-manager solutions.