In common with many others, Wasserdicht’s international pension plans have dispensed with most of their traditional active equity allocations over the years.
At one of our recent meetings, Jim in the US recalled a recent note from one US manager, arguing that passive investing is as bad for society as Marxism. ‘Given how well our equity index investments have done recently, I hardly think making you richer is bad for you,’ he joked.
Following the financial crisis, we also started to allocate to low-volatility equity strategies and some smart beta index strategies alongside our market cap-weighted holdings.
Recently I made a trip to Paris to see Jean-François, the CEO of our low vol quant and smart beta manager.
At lunch, Jean-François helps me understand some of the debates on factor crowding and timing of investment factors. He scribbles a lot of notes, few of which I can comprehend.
The discussion moves on to a recent academic conference Jean-François has attended. ‘Can you believe there are some people who still believe in efficient markets,’ he huffs. ‘These people are like Old Testament prophets.
Jean François also satirises the noisy debates between some of the leading smart beta proponents: ‘These guys are like WWF wrestlers,’ he declares. ‘They are heavyweights alright, but their fighting is all for show, so don’t feel sorry when they slam each other in the media.’
Despite the benign market conditions of late, what advice does Jean-François have for us about asset allocation? ‘Here I can only predict that equity market real returns will probably be lower in the coming decade. So don’t rely on the equity risk premium to solve your problems,’ he says. ‘Apart from this one, the only free lunch you’re going to get is diversification.’
Pieter Mullen is investment director at Wasserdicht Pension Funds