Diary of an Investor: Job security
Off to Zurich for a day with my colleagues from around Europe. The English talk ‘brainstorming’ and think ‘outside the box’ but we on the continent want to avoid storms. Besides, boxes allow enough room for movement so that we do not make mistakes. Let me quote the agenda subject mentioned in the letter we received “to discuss the future possible structures of our European pension funding”. This is code for ‘finding ways to avoid being blamed in the future’.
Market shocks cause people to get upset. Put a collection of upset pension fund directors from the same multinational in a room off the Paradeplatz and we observe the combination of muddle, a little panic and lots of bonhomie in all its European befuddled glory. My Swiss colleague chairs the session of cross-border fiduciary management. Scary.
The subject stemmed from an article that stated that consolidation of all plans under one fiduciary manager would be the equivalent of finding Utopia. We directors would arrive at our Eldorado and then, in a multi-lingual crocodile line, head off to the Elysian Fields for redundant investment professionals. An outcome that explains why fiduciary managers and implemented consultancy providers are now marketing directly to the CFOs.
Ulrich begins: “Here in Switzerland our stochastic projections show we might be able to end underfunding by raising our equity exposure to 40%, in conjunction with recapitalisation measures. We think such a high equity weighting very risky and wonder whether a fiduciary manager might be better able to look after our pension commitments.” There is immediate support from Germany. “40% is very high; we would not want to raise our own exposure above 12%”. “Pieter, you have fiduciary managers in Holland - what is your view?”
“I don’t see why we should appoint one on the basis of us not being able to change our asset allocation policies to meet the underfunding challenge. Just because we think something is risky does not mean we are better off having someone else make similar difficult decisions”. “And value added?” asks Ian from the UK. “Well, they have won much business in Holland but equally the performance of many value-added services has been very disappointing”.
Eric from Belgium: “But we hear that these managers will hedge our liabilities, work with us strategically, and look after investment and custody.” “But Eric, do you want to be the proponent of a strategy that has all its oeufs in the one fiduciary basket? Do you see this as a panacea?” “Fiduciary managers will face the same issues as us, and there is no reason why they should be better equipped at finding solutions than us working with our consultant,” chimed in Ian. “So we should not step outside of our box?” “No,” smiled Ian, “not when our own box can provide advantages such as job security”.
Pieter Mullen is investment director at Wasserdicht Pension Funds