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Institutions must dare to invest in untested asset classes

Pension funds and other institutions need to be braver, given the environment of low interest rates, and consider strategies used by hedge funds, the 2014 IPE Conference heard.

Speaking at the IPE Conference & Awards in Vienna, Günther Schiendl, CIO at Austria’s VBV Pensionskasse, told a panel session on trends in investment and asset allocation: “We need to be more brave – we need to dare to invest in things that are untested.”

His said his pension fund in particular needed to be more dynamic, investing for the long term to deliver returns of 6% year after year.

“The point is, we need to deliver absolute returns,” he said. “My former boss was saying that, in that sense, we are a kind of hedge fund – and he was right.”

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A poll conducted among conference participants showed that 43% of respondents had regularly been forced to reject an investment opportunity they liked due to regulatory, resource or operational constraints.

A further 35% said they had once or twice had to say no to a potential investment for these reasons.

Endre Pedersen, senior managing director at Manulife Asset Management, told the panel at the conference in Vienna he favoured Asian fixed income for generating stronger long-term returns in the current environment.

“You need to take on a different type of risk,” he said.

Meanwhile, Rick Lacaille, CIO at State Street Global Advisors (SSgA), said the simple answer to the low-yield problem was equities.

“In cash flow terms, we are not advocates of the second stagnation hypotheses,” he said, adding that SSgA expected global growth of between 3.5% and 3.8% next year.

“People are understandably concerned when they see equity markets at record highs, but then they see profits at record highs,” Lacaille said.

In Asia, he said, earnings are below trend, and this means there is an opportunity for share prices in the region to catch up.

“From our perspective, the global story – the growth story – remains compelling,” he said.

Paul Watters, senior director and head of corporate research at Standard & Poor’s, said pension funds would find it hard to meet their target returns in long-only strategies using conventional assets, but that what was important was to hit risk-adjusted returns. He said this meant there was a lot of interest in alternatives.

“All the surveys, all the academic literature you read on that, it seems fairly clear there’s going to be continued growth in that, and asset allocation is 25% from institutional investors,” he said.

The panellists discussed the investment opportunities that were emerging in fixed income as a result of the bank disintermediation process. Benoît Durteste, managing director at Intermediate Capital Group, said: “An underlying theme is there is a significant premium for investing directly.

“If you can get a combination of an asset class where you are getting this premium for investing directly, and you are in an area that is experiencing significant growth, then you have a winning formula. 

“You are getting this combination that makes it quite attractive, which is why a number of pension funds are investing heavily in that segment.”

Schiendl said that, over the years, pension funds learned how the banks made their money, and the institutions can now do this themselves, creating a “fair and well-structured food chain”.

He also said more generally it was imperative that pension fund portfolios were geographically diversified now.

“It makes sense to have global diversification and not Europe-only diversification,” he said.

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