EUROPE - Pension funds should build stronger portfolios to brace themselves for worst-case scenarios rather than just researching them, the annual IPE Awards Seminar in Paris was told today.
"We were too often disappointed by diversification when we needed it the most, when markets collapsed," said Owen Thiers, director of institutional clients at Citigroup Alternative Investments.
"Rather than spending all our money on research we should build stronger portfolios." He likened that precautious step to building stronger houses in an earthquake area ‘just in case'.
He identified four different sources of return, of which only two are used by most funds. Apart from alpha and beta he sees liquidity and downside risk as important sources of return.
"In a real portfolio for example private equity in emerging markets can get you this diversification. It not only gets you control value-added return but also a high liquidity premium."
"A new way of diversification of a portfolio has to be built. This would also create a more diverse holder base for the risks which in turn diminishes the risk of a meltdown," he explained.
Thiers added that analysts see the major cause for a meltdown in a lack of market capacity for holding the risk and in the fact that currently risk is held by a quite homogenous group of people who are likely to pull out of the market at the same time.
Pascal Blanqué, chief investment officer at Crédit Agricole Asset Management, pointed out that the creation of new products was "a critical point", not only in the alpha sector but also for finding beta, for example in foreign exchange, commodities and volatility.
He also warned that it would become more difficult to find alpha once interest rates start to rise again.
Jean-Francois Schock, MD at State Street Global Advisors, agreed that the creation of new products would be "the key to lure savers into the investment market", especially in rapidly growing economies like China.
Another warning for pension funds came from Henri-Michel Tranchimand, executive committee member at Dexia AM. He likened the current boom into clean-energy related investments to the Internet bubble.
"Think about climate change but do not jump into this trend for your investments. Some of the new wind turbine companies are surely excellent investments but some might be wiped out - maybe by the wind."