Alternative investment, tech funds, and European regulation on fund management and pension funds were they key issues discussed during the Fund Forum International 2000 conference held in Juan les Pins, in the south of France, in July.
During his presentation based on demystifying traditional and alternative investment, Thomas Schneeweis, professor of finance at the University of Massachussetts, said that exposure to alternative investments that respond to different market factors other than stocks or bonds is required to benefit most from asset diversification. “The benefits of certain alternative asset strategies are due to their sensitivity to different market factors,” he said. “ These benefits are due to low correlation rather than high historical return and some assets have low correlation in down markets and high correlation in high markets.” To succeed when taking into account alternative investors there is a need for the best information. “Investors must realise that if information is costless it is almost certainly worthless. If one wishes to obtain additional excess return one must concentrate where information is more costly,” Schneeweis said.
The lack of sufficient information might be one of the reasons why institutional investors still look suspiciously to alternative asset classes. Sally Tennant from Gartmore Investment Management commented that institutional investors are still reluctant to include alternative assets in their portfolios. “Although we have seen how alternative investments have entered the fund management mainstream they have not yet entered the mainstream of institutional portfolios,” she said. Tennant explained that, although hedge funds could help pension funds get high absolute returns, reduce overall portfolio volatility and get away from index tyranny, she doubted figures from Watson Wyatt/Indocam suggest ing that the exposure to alternative investment from institutional portfolios in continental Europe will increase from 18% to 38% in three years.
In terms of portfolio diversification, Jim Mellon, chairman at Regent Pacific Group, said the technology sector will become an integral part of the process, changing the way funds are distributed. However, Alastair Ross Goobey, chief executive of Hermes Pension Management, asked whether institutional investors should focus more on value than on success. “The last few years have seen active fund managers go through a very difficult period,” he said. “Much of this has been attributed to the focus growth or technology as opposed to the traditional Graham & Dodd methods of value investing.” Goobey focused the rest of his presentation on value investing and corporate governance as the way forward for institutional investors.
Regarding regulation, Steffen Mathias, secretary general at FEFSI, discussed the way European legislation will change the fund management industry and the developments towards the implementation of UCITS III directive. Mathias highlighted the slow pace of the negotiations with the European Commission and how this has decreased the use of UCITS funds in Europe. He explained the potential impact of the directive on the European investment funds industry pointed that it would bring a broader range of products into the market making it more competitive, increase cross-border activity and competition from third countries.
Also discussing regulation at European level, Koen de Ryck, managing director of Pragma Consulting, assessed the progress towards the creation of an EU directive for pension funds, highlighting the increased need for convergence. “There is an increasing awareness that the single market will be incomplete without co-ordination and where possible harmonisation of pension funds,” he said. “This is the right time for the proposal of an European directive because pension funds are the only category among all the large social and financial institutions not regulated at EU level.” De Ryck said that this move will enhance capital markets bringing more sophistication regarding asset allocation and increasing the of investment styles, giving investment funds a more significant role in the move to defined benefit systems and individualisation.