“Allocation, allocation, allocation.” The words of Christine Farnish, chief executive of the National Association of Pension Funds. She was speaking at the NAPF’s annual investment conference in Edinburgh, and was identifying one of the key issues facing pension schemes at the moment. The other theme to emerge was a new feeling that asset managers have become too constrained. The talk at the conference was of ‘freeing the managers’.
Chris Hitchens, the chairman of the NAPF’s investment council, called for pension funds to include managers more in decision making.
He identified various ‘straws in the wind’ – such as liability driven investing, long-term mandates, absolute returns and the ‘best ideas’ approach – as evidence of a shift towards letting managers take decisions again. “These are all ways to give decision-making back to fund managers,” he said.
He cited the long-term mandate competition that was run by the Universities Superannuation Scheme and Hewitt Associates – now transformed into the ‘Marathon Club’ – as an example where managers were becoming involved again.
But he thought more could be done. “I do wonder if we’re making the best use of fund managers’ expertise,” he said. Managers were being “corralled” into just making small decisions, with the big decisions being made by trustees with the aid of consultants.
Hitchens, chief executive of the £14bn (e20bn) Railpen scheme, joked that he personally found it difficult to sell – or fire – managers after good performance. “I would like to sell after outperformance,” he said.
He said the NAPF has published a series of guides for trustees to coincide with the conference – on swaps, hedge funds and derivatives. There is also one on the relationship between trustees and consultants – put together by David Morgan, chief executive of the Coal Pension Trustees which is responsible for the £10.4bn Mineworkers’ Pension Scheme.
He said schemes now have a “whole lot of new tools for our toolbox”.
Meanwhile, a senior figure in the consulting field warned about hedge funds. “The risk of contagion to the health of the financial system cannot be underestimated,” said George Henshilwood, principal at Hymans Robertson, referring to the amount of derivatives being used by hedge funds.
“I’m not a great fan of hedge funds, particularly in the context of pension funds,” Henshilwood said. He said he was sounding a ‘cautionary note’ to trustees. He said data on hedge funds was “scanty” and that they benefit fund managers – while trustees were usually only buying past performance. He wondered if they fitted with the prudent person principle of investing. He pointed out that the Myners Review “didn’t tell us to buy into every new idea drummed up by the fund management industry”.
“Do we really know what we’re investing in? We’ve forgotten about investing and our focus has shifted to just making money,” he said, adding that he worried about the potential backlash on trustees “if and when it goes wrong”.
He was worried about the lack of transparency, compliance and lack of good managers in hedge funds.
Henshilwood’s arguments were countered by Ian Morley of Dawnay Day Olympia. He said hedge funds preserve wealth while not being risky. “Give managers the freedom to have more tools,” he said.
Also at the event was perhaps Europe’s top pension executive, Roderick Munsters of Stichting Pensioenfonds ABP. He said he thought bonds were not currently attractive – and that he would not bet against commodities.
“I think current valuations are unattractive,” Munsters said, referring to fixed income. “It’s not my favourite asset class.”
He said the ABP fund’s commodities portfolio had returned 18.8% in 2004. “Let’s be honest, we’ve been lucky. I wouldn’t dare betting against commodities as an asset class.”
Munsters also advised pension funds not to get involved in private equity unless they were in it for the long term.
Real estate returns in 2004 – 37.5% for listed and 19.8% for non-listed – were “fantastic”. But he identified that markets were becoming stretched and that leverage was becoming a problem.
Alternative assets returned 5.8% last year at ABP. “As far as I’m concerned it’s not an asset class – and it’s an expensive skill set. Don’t buy into a black box.”