A group of CIOs from some of the largest pension funds in the Netherlands has called on asset managers, listed companies and other schemes to “refocus” on long-term policy.
In an article published in the VBA Journal, the magazine for the Association of Investment Professionals, the CIOs said conflicts of interest between pension funds and asset managers must be reduced while the impact of long-term share ownership must be increased.
The contributors, including Eloy Lindeijer of the €186bn asset manager PGGM and Inge van den Doel of the €59bn metal scheme PMT, said executive boards and shareholders were putting companies under increasing pressure to meet financial targets quickly.
“As a consequence, the companies often postpone investments,” they said.
In their opinion, pension funds and asset managers must also do their part to bring about the necessary change, “as they have also increased their focus on the short term, due to falling interest rates and regulation, including monthly reporting to the supervisor about funding and asset allocation”.
“As a consequence,” they added, “many asset managers have limited the period to achieve their benchmark to three years.”
To align the interests of all stakeholders, remuneration must be tied to long-term value creation, according to the CIOs, who called for additional research into preventing “perverse” incentives for pay.
They proposed that individual pension funds and their asset managers jointly design investment policies for the long term, which the scheme then translates into an investment mandate.
The CIOs also argued that risk/return measurement should long term, recommending the 20-year swap rate plus a 3% surcharge as benchmark.
Quantitative performance should be measured every 5-10 years and could contribute to a different way of thinking among the stakeholders, they said.
They pointed out that, given pension funds’ liabilities for a period of up to 40 years, monthly reporting about development in the investment portfolio was not essential.
They said traditional risk management – focusing on volatility, tracking error and standard deviation – should be extended with scenario analysis, aimed at the risk of missing long-term targets.
The CIOs argued that long-term reporting must also provide insight into the “intrinsic value” of the companies within the investment portfolio, and said asset managers could contribute by investing in their own investment funds, as well as by rewarding fund managers for long-term investments.
Asset managers should also consider cutting management fees longer-term mandates, they said.