1. Is a capability for structured products a requirement for asset managers today?
2. Where will pension funds look next for alpha?
3. Which current investment trends are merely a fad and which will last?
4. Is fiduciary management as applied in the Netherlands a blueprint that should be adopted elsewhere in Europe?
5. Are 130/30 products an end in themselves or a stage on the route to greater convergence between long only and hedge funds?
Aegon AM
Eric Rutten
CEO Netherlands
1. Structures are becoming increasingly important and are a great source for alpha-creation or destruction. I can imagine certain niche players are less interested in developing structured skills.
2. The first duty of pension funds is to meet their commitments towards their members and their ambition is to compensate for inflation. Inflation linked products and LDI are thus a priority. Alpha creates room to meet, or even exceed, customer expectations. The nature of the alpha source is of less importance as long as it fits the pension funds’ framework and ambitions.
3. LDI is a sustainable trend. Matching products are becoming more important for asset managers, especially in the context of tailored solutions. Also alpha/beta-separation will last. Another trend is pooling. In Europe, convergence will help to create scale. However, the combination of durable skills and commitment is rare. Only a handful of players will ultimately deliver the service. I do not believe in ‘benchmark-hugging’: alpha without risk doesn’t exist.
4. Fiduciary management is an adequate solution for balancing the interests of various stakeholders and fits the Dutch pension fund landscape well. Any market with similar governance structures of sizeable institutions might have appetite for this concept.
5. 130/30-products bridge a gap between long only and long/short hedge funds. Alongside 130/30, several other hybrid products and concepts will emerge. Thus, it is not only a matter of convergence, but also a development towards a far greater variety of funds and products with different risk/return profiles.
Allianz Global Investors
Carsten Eckert
Member of the Allianz GI board
1. Structured products are combinations of equity underlyings and total return shaping instruments, most likely options. These serve as a means for asymmetrical return payoffs and for generating additional alpha. Expertise in this field will be a requirement for successful asset managers.
2. Alternative asset classes (hedge funds and private equity) are not in the focus. Performance pressures force the industry to open its investments in favour of satellite products. Additionally, structural and packaging investment decisions, eg guaranteed bonded loans, participation certificates as well as I- and W-Shares, enable an insurer to avoid impairments and to cushion temporary negative market impacts.
3. The alpha capabilities in the alternative space will be challenged and increasingly commoditised by mimicking the respective risk/return profiles. Accordingly, fee levels for hidden betas will be reduced. True and sustained alpha will be an ongoing trend, which will imply that fees for beta will be reduced. LDI is driven by regulation/accounting and should be looked at accordingly.
4. Fiduciary AM is driven by regulation on a country-by-country basis, ie it is not a European story per se. However, the trend towards outsourcing of an ever-increasing part of the value chain in asset management towards outside parties is likely to continue all over Europe.
5. The purpose of 130/30 is alpha extension, and as such it will not be viewed as a hedge fund strategy, but will be linked to institutional core equity assets and is about to become a mainstream effort in this area.
Ashmore
Jerome Booth
Head of research
1. Yes and no. Structuring is no substitute for underlying alpha generation. However, it helps provide investors with a fuller range of investment products.
2. The emerging markets - and across a wider and wider range of asset classes there. In 20 years many of the established asset classes in developed countries will have their corollary in the developing world. In the shorter term, pension funds are still seriously underweight dollar-denominated emerging debt and have only just starting investing in local currency emerging debt. EM special situations (a combination of distressed debt and private equity - a lot of it infrastructure) is also starting to attract serious attention. It can offer high returns with much faster drawdowns and without excessive leverage compared to developed world private equity.
3. The emerging markets story is about the end of the Cold War, globalisation and the spread of market economy. It is not in any sense a fad, indeed we have only just seen the tip of the iceberg. This period of globalisation is fairly young so far, and for its first 25 years has mostly focused on capital flows within developed countries. That is about to change as capital moves to the developing world over the next few decades.
4. I do not have a strong view on this
5. Or on this.
AXA Investment Managers
Dominique Carrel-Billiard CEO
1. Structured products provide asset managers with two key capabilities: the ability to generate alpha and manage risk for clients, and the opportunity to participate in the expansion of new market segments that have the potential to cannibalise existing ones. Structured products have thus become a requirement for asset managers.
2. The formal separation of beta and alpha has led clients to embrace absolute return approaches. Pension funds will continue to increase their allocation to alternative asset classes such as real estate, structured products and private equity.
3. The plethora of investment ideas and trends all have validity in a given market environment and reflect the current dynamism and innovation of our industry. Ultimately, the investment trends that last are those that generate significant returns on investments sensibly for clients, that put their clients’ interest first and that help them meet their goals in the long run.
4. Fiduciary management is a new way to look at how you assemble the ALM-asset management-administration and reporting value chain. As such, it could become a model that spreads to other geographical markets or products. Eventually the degree to which this model grows will depend on the benefits it actually delivers.
5. 130/30 products offer investors exposure to the potential benefits of short selling while minimising some of the risks and volatility associated with hedge funds. These products are a bridge between the alternative space and a traditional long-only strategy and will continue to grow as a specific investment approach.
BGI
Mike O’Brien
Head of institutional
business
1. Yes. Managers should at least have a capability to analyse these structures as part of an actively managed fixed income or cash portfolio. Synthetics are more widely used in the fixed income world than five years ago, with fund managers now partnering investment banks in the design and distribution of products such as ABS and CDOs.
2. There is an increasing appetite to seek alpha from many more sources. Today’s traditional sources of alpha include equity stock selection, GTAA, fixed income duration and credit selection. Pension funds will look for better ways of extracting alpha from these sources through the use of 130/30 ‘partial shorting’ strategies and pure long-short investing.
3. Prudent investors don’t follow fads. LDI is just a better way to balance risk and return in a world where stakeholder relationships are increasingly complex and where liabilities, assets are marked to market and the financial management of the pension plan is much more transparent. Demand for a particular asset class, such as commodities and infrastructure, may exceed supply temporarily, driving pricing anomalies. Private equity investing is also having a temporary effect on developed equity market prices in the UK.
4. Yes, for certain pension plans without the appetite to manage the governance of their plan’s investment programme effectively.
5. They are really a first step towards the greater separation of alpha generation from market exposure (beta). The strategy takes the best of hedge funds - applying shorting and leverage - to improve portfolio efficiency and alpha generation.
BlackRock
Andrew Dyson,
Managing director
1. Structured products are an essential part of a modern manager’s toolkit. Derivatives-based pooled solutions, for instance, facilitate LDI implementation by smaller schemes. Likewise, they are of increasing relevance to DC members. Further innovation is to be expected under UCITS III.
2. We see schemes making their assets work harder by targeting above-liabilities returns across a wider opportunities set. This includes tactical asset allocation, short extension strategies, global property, (soft) commodities and private equity. Depending on the asset class this will be either through (in)direct investment or via holistic multi-asset solutions.
3. Taken in isolation, some could potentially become a fad. However, the key is to integrate each approach into a genuinely diversified investment strategy that is explicitly linked to the scheme’s liabilities. By making their liabilities the cornerstone of their investment strategy, schemes avoid unwanted risk or over-reliance on a single asset class.
4. Fiduciary management in the Netherlands is a broad concept, ranging from strategic allocation advice to complete outsourcing of the CIO function. We believe it is worthwhile investigating the relevance of certain key aspects elsewhere. This includes advice on risk budgeting and strategic asset allocation as well as, for smaller schemes, suitable multi-asset solutions.
5. 130/30 or more generally short-extension funds are a natural extension of long-only funds. They represent the nexus between long-only and pure hedge funds. Unlike pure hedge funds they still contain a sizeable percentage of beta and therefore warrant a separate place within a diversified portfolio.
BNP Paribas Asset Management
Christian Dargnat
CIO
1. A structured product capability is indispensable. The growing demand for guaranteed and absolute return products shows clients increasingly require it. The complex management of the asymmetrical risk profile of managed funds also requires a highly evolved structured capability. Moreover, the skills of structured fund managers complement those of derivatives managers, particularly regarding options and derivatives strategies which can improve the risk/return profile of a traditionally managed portfolio.
2. Emerging markets, both debt and equity, will enlarge the investment universe and offer pension funds wider diversification opportunities. Growing demand from pension funds will in turn lead to the development of more sophisticated products and financial techniques in these markets.
3. The current buzz around LDI might be seen as a marketing approach but it is what many asset managers were already offering. Interest in commodities and infrastructure products will continue as long as emerging markets continue to become more powerful. We believe there will be further demand for these asset classes. Separately, there will be greater demand for inflation-linked bonds to insure against the risks of long-term inflation.
4. No answer.
5. The convergence between long only and hedge funds seems to be unavoidable, particularly due to client demand and the growing prevalence of best practice. These 130/30 products are an indication of the coming convergence between traditional and alternative fund management techniques. The major obstacle to this trend now is regulatory constraint. Nonetheless, we believe the frontier between these two worlds is likely to disappear within a few years.
Cordares
Adri van der Wurff
Member of the board
1. Asset managers differ in their roles. Boutique players flourish by providing structured products whereas general asset managers will have these products in their portfolios both made in-house and bought from another provider.
2. New sources of alpha will come from superior asset selection techniques and new and/or illiquid assets classes. Pension funds should not look for alpha alone. We believe the next step is risk/return management. This is the operational side of asset liability management and concentrates on dynamically structuring the asset portfolio to ensure a good mix of guarantees for the nominal pensions and a maximum probability of indexation.
3. We think investment trends will not last in their present forms. Infrastructure, life settlements and so on are strong candidates for further portfolio diversification, but the market will bring new products every year.
4. Fiduciary management can be applied all over Europe. However, each client will require a tailor-made solution that fits the local circumstances and regulations.
5. Of course, 130/30 products aren’t an end in themselves. Risk appetites, legislation and regulation tend to vary over time and over regions. New products and hedging instruments help us to overcome the momentary and local restrictions but they also bring expenses and opportunity losses. Answers will have to vary according to the client issues they are supposed to address. Broadening the use of balance sheet management techniques will contribute to better risk/returns.
Credit Suisse
Robert Parker
Vice-chairman, asset
management business
1. Asset managers should have structured product capability, as they have greater impact on underlying bond markets. If a manager is not following these markets they may miss the impact of these products, leaving them exposed to adverse market movements. Structured products also allow clients different payoff profiles, portfolio diversification, satisfy regulatory and legal requirements, particularly for CPPI-type products.
2. Structured products, soft commodities like agriculture, volatility and mortality.
3. Most of the recent investment trends are durable. Capital flows into private equity and infrastructure are appropriate for matching longer-term liabilities and should generate higher returns than vanilla products. Likewise, the focus on liability matching will continue since companies want to reduce the risk to their profitability from pension fund liabilities. Hybrid products and hedge funds are consistent with the trend towards total return investing. The only caveats are that pension funds will be cautious on products with high levels of volatility and resist paying high fees where performance is pedestrian.
4. Yes, it should be adopted elsewhere. Developments in pension fund management, using complex techniques to ‘de-risk’ schemes and diversification to achieve portfolio out-performance are putting strain on the time and expertise available to trustees to cope. Fiduciary allows experts with time, the opportunity to work with schemes to create suitable structures and implementation while aligning the fiduciary manager with pension funds interests.
5. Long-only and hedge fund businesses are converging, long only and long short will have different risk/reward profiles and hybrid products such as 130/30 are part of this risk/reward spectrum.
Dexia Asset Management
Naïm Abou-Jaoudé
CEO
1. Financial, fiscal and regulatory environments are evolving profoundly. New client needs are translated into changing demands. One of the answers is structured asset management where the primary objective is to improve the risk return profile.
2. Pension funds have been looking for alpha by integrating strategically new asset classes that give access to other types of risk premium (eg private equity, absolute performance, high yield). These asset classes will continue to be a source of alpha. But as spreads have narrowed, the focus of alpha generation will gradually shift towards the tactical choice between different asset classes and the active management within each class.
3. LDI has structurally changed pension funds’ mindset by systematically integrating the analysis of liabilities in strategic asset allocation decisions. We expect a growing and structural interest in investment solutions which have risk-return characteristics that do fit in this framework, eg inflation-linked bonds, infrastructure funds, commodities, high yield.
4. Fiduciary management can be an efficient solution for smaller pension funds active in complex and highly regulated environments. Nevertheless, we expect most pension funds to continue to manage their fiduciary duties in-house as it is illogical to outsource strategic decisions.
5. 130/30 solutions are more like a cross fertilisation between long only and hedge funds, as techniques from the hedge fund industry (shorting part of the portfolio) are used to obtain long-only objectives (outperforming an equity benchmark). Especially for quant managers, 130/30 approaches can be an interesting way to raise tracking error without reducing information ratio.
Deutsche AM
Peter Roemer
Head of European
institutional business
1. Innovative products are getting increasingly complex. Smart packaging capabilities are key to delivering sophisticated strategies while meeting regulatory, accounting and tax requirements. The best asset managers can flexibly deliver investment solutions in any wrapper that clients want, including structured products.
2. The current trend of separation between alpha and beta is set to continue. Alpha strategies which offer uncorrelated absolute returns will be in high demand. We believe the fixed income space will be a focus of alpha generation with the emergence of total return fixed income strategies that incorporate hedge fund-style components to deliver risk-optimised target returns.
3. Strategic asset allocation is at centre stage. However, investor interest might fade if there is a change in secular trends. As liability-driven concepts are expected to see increasing demand, certain structured product-based solutions will not succeed given their embedded inflexibility.
4. Fiduciary asset management requires the provider to work on pension fund management from ALM to setting risk budgets through to the reporting of investment performance. This trend is expected to continue and the Dutch fiduciary model can serve as a blueprint for other developed pension markets in Europe.
5. 130/30 strategies are a natural evolution in the blending of long only and hedge fund capabilities. Due to their ‘beta one’ style, investors psychologically have a pretty good idea of how their investments will behave given any particular move in the equity market. We believe this convergence trend between long only and hedge funds is set to continue.
F&C
Fernando Ribeiro
Head of investments
1. Convergence in the financial solutions world makes it quite difficult to compete on traditional products alone. CDOs are a key strategic initiative this year.
2. High alpha strategies in both equities and bonds will be in demand and asset allocation as a source of alpha will grow in emphasis with the emergence of GTAA funds. The hunt for absolute returns will also persist, leading to a focus on a convergence of techniques from hedge funds with traditional managers, 130/30 being an example.
3. Conducting a proper risk budgeting exercise is paramount. This can only be done if the liability side is taken into account; LDI is a reality that is here to stay. Commodities will continue to be considered as a good portfolio diversifier. Private equity will remain popular but limited by capacity constraints. Interest in socially responsible investment will increase.
4. There is no blueprint as even in the Netherlands fiduciary means different things to different customers, providers and consultants. However, this management approach in its different forms is here to stay. We envisage this concept becoming popular in other countries but we should remember that in most countries “fiduciary” in another guise is already in place.
5.Segmentation of beta from alpha will continue to lead towards new and more innovative ways of stripping excess returns from index returns and the hunt for absolute returns will persist. This implies a reasonably high degree of convergence between techniques traditionally used by hedge funds and traditional managers. 130/30 is an example.
Fortis Investments
Richard Wohanka
Global CEO
1. The world’s newest investors, the emerging market middle class, face a huge dilemma: a need to invest for old age but an inability to afford losses. Structured products are their ideal asset class. Asset managers ignore 500m investors at their peril.
2. With today’s yields, pension funds have to innovate. The use of derivatives opens doors to more sophisticated approaches, new hedging strategies and portable alpha products. Additionally, illiquid portfolios bring extra yield. We see growing interest in new asset classes (cat bonds, life settlements, non-listed RE) and new regions (Africa).
3. Sustainable investing should last, supported by rising awareness of issues such as the environment as well as growing regulation/tax incentives for investors. This strategy has proved that it can provide good risk/returns by moving away from strict exclusion rules and focusing on companies bringing solutions to sustainability problems.
4. Fiduciary management in the Netherlands is a proven concept. Vital to rolling it out over Europe is the local presence of the provider and his global reach, together with his in-depth knowledge of local regulatory requirements. Once these criteria have been met, coupled with a mission to meet all your client’s needs, you have a blueprint.
5. 130/30 funds create a bridge between long only and hedge fund strategies. Like the latter, they allow investors to exploit a wider range of opportunities with limited leverage. By adding symmetrical long and short exposures and bypassing the high concentration of benchmarks they increase idiosyncratic risk without increasing market risk.
Franklin Templeton Institutional
David Smart
EMEA managing director
1. No. Some require structured products but most business still targets alpha generation at the lowest price.
2. Property. Where pension funds have invested in property the emphasis has been direct, domestic investment. There will be increasing searches for alpha globally, particularly unlisted, where the shift is from core to value-added and opportunistic.
3. LDI, generally presented as a new phenomenon, is a fad caused by regulatory changes. If pension funds weren’t running investments to meet liabilities before, they were in dereliction of their fiduciary duties; however, I don’t believe that was the case. Regulatory change has forced funds to move towards exact matching of liabilities, duration in fixed income portfolios and shift more into bonds at the expense of long duration equities. It’s unfortunate this has occurred at multigenerational lows in long-term rates and when actuaries have revised longevity assumptions sharply upwards. Commodities have interesting diversification characteristics; backwardation between current and futures prices has been eradicated by increases in pure financial demand, which means future returns will be relatively less attractive than historic. Infrastructure has global demand. It’s an attractive asset class but not a one-way bet; buyers should be aware of pouring money into holes.
4. No.
5. Some convergence; the more successful route may be some hedge funds moving into long-only strategies. It’s conceptually appealing, but difficult to implement. Many long-only managers will struggle with the strong trading discipline needed for running short books, which frequently conflicts with the time horizons long-only managers use.
Goldman Sachs AM
Alex Fletcher
Co-head of business
development EMEA
1. Structured products clearly have a role to play in European investors’ portfolios. Providing asset managers have good underlying fund products to offer, there is opportunity for them either to work with an external structurer or through an in-house capability.
2. There is a greater trend towards understanding the sources of return, whether alpha, beta or what we call ‘exotic’ beta - and paying accordingly. In search for genuine alpha, capacity and fees are the largest issues. Evolving opportunities include the trend towards less constrained investing and volatility products.
3. We believe that LDI is the most logical approach to pension fund management, particularly in the light of updated regulatory and accounting rules. Implementation options are open to interpretation, but we believe that schemes will increasingly look for a combination of a liability matching and a return-generation portfolio.
4. This is a significant decision for the individual scheme, but we are certainly seeing increased demand for fiduciary management outside the Netherlands, including Germany and the Nordic region, as funds question whether they have the wherewithal in-house to cope with new regulations and the changing investment universe.
5. We believe 130/30 strategies are an enhancement of long-only investing and not a hybrid hedge fund. Unlike many hedge funds, 130/30 strategies generally maintain specific risk and return targets relative to a well-defined equity benchmark. In addition, they provide full exposure to the equity market, and their primary risk is market risk.
Henderson Global Investors
Arno Kitts
Director of European
institutional business
1. It is not a requirement but a ‘nice to have’.
2. Pension funds tend to trail foundations and other institutional investors. Foundations were early movers in to private equity and property, they are now looking at hedge funds, carbon emissions and forestry opportunities among others. These could be the next places for pension funds to look.
3. We see that LDI as a product could be a fad. However, LDI has a proved a useful framework for pension funds to look at their risk against liabilities. I believe it will be a long-lasting structure for the way in which consultants and pension funds think.
4. All stakeholders in the market have fiduciary responsibility to ensure assets are managed with care and consideration. The developments in the Netherlands reflect the growing realisation that the level of governance needed is a rising trend and this has only highlighted the growing spectrum of governance levels among pension schemes. Fiduciary management addresses some of these issues but is not a panacea solution that will meet the needs of sponsors across Europe.
5. These funds allow managers to build better portfolios and offer more intelligent solutions. However, 130/30 portfolios are beta one products, where the total return correlates highly to the equity market. I believe we will continue to see innovation in this area, for example, why not run a 30/30 or 50/50 market neutral product to produce a more absolute return?
Hermes Pensions Management
Mark Anson
CEO
1. This is a crucial element of asset management going forward. As more investors adopt the separation of alpha and beta, structured products will help to fulfil this goal. They can be as simple as an ETF that targets a local risk premium, ‘bespoke beta’, to sophisticated structured products that access the credit derivatives market.
2. Pension funds have bought into private equity and hedge funds. Future sources of alpha include active commodities, tactical asset allocation across local and macro risk premiums, active currency and volatility swaps.
3. Commodities and LDI are not fads. Commodities are a wonderful diversifying source for stocks and bonds and diversification is always appropriate in any portfolio. As pension funds mature they will inevitability de-risk and so have much greater duration matching between their liabilities and assets on their balance sheets. This is why LDI is here to stay.
4. Fiduciary management is a blueprint for all pension funds. The Dutch model is just one, different models will apply based on different cultural regimes, different access to the capital/investment markets and different liability schedules. Focus on fiduciary duty first and a particular model second.
5. 130/30 funds represent better corporate governance in the asset management industry. Previously an asset manager could go 110% long and 10% short and call himself a hedge fund and then charge 2 & 20 fees. With the advent of 130/30 funds, hedge fund pricing has been eliminated because traditional asset managers have created a ‘quant active’ fund.
Invesco AM Deutschland
Jean-Baptiste de Franssu CEO continental Europe
1. Today this is not a necessity as such as a number of traditional products outside the structured product space are still in demand. Nevertheless, not having this capability will limit an asset mangers business opportunities as structured products become more mainstream in pension funds’ portfolios.
2. It is difficult to say, as this is typically determined by the markets.
3. How one defines what is a fad versus what will last depends on one’s specific needs. Large pension funds may invest in infrastructure for 10 years while a fund of fund manufacturer may see it as part of a short-term asset allocation. It is also important not to confuse financial techniques with investment sources, as any proven financial techniques are often quickly endured by the industry and have a lasting effect. Investment techniques like LDI are such examples
4. In principle fiduciary management is a logical blue print for the smaller pensions across Europe because they tend not have the in-house resources to manage their portfolios in the most professional way while complying with new regulations. It also could be extended further to include the oversight of liabilities, which remains within the remit of actuaries.
5. More likely a convergence between long equity and traditional hedge funds than an end in themselves, as traditional fund managers with quantitative investment approaches have for a number of years offered 120/20 strategies. 130/30 is a continuation of this trend as traditional hedge funds become more mainstream.
ING Investment Management
Maes van Lanschot
CIO
1. Clients are showing an increasing interest in and need for structured funds. Structured funds allow clients to get exposure to alternative risk-return profiles and features like capital protection or income provision. Asset managers can add value to clients by offering those products against attractive prices in a regulated framework.
2. Pension funds are likely to continue to look for absolute and total return products, via hedge funds (the usual suspects such as long/short equities, convertible arbitrage, capital structure arbitrage, etc) or otherwise. Currency alpha, infrastructure exposure, total return real estate, CLOs, EMD local currency duration exposure and 130/30 are likely to gain market traction.
3. In the recent past funding ratios have improved significantly due to good returns in the equity markets and rising interest rates. We therefore expect attention to shift away from nominal duration matching solutions to real duration matching solutions.
4. Fiduciary management as applied in the Netherlands comes in various shapes and forms, ranging from fiduciary (multi-manager) asset management to a full fiduciary investment and services relationship. We are convinced that pension funds - and insurers - outside the Netherlands can reap the same benefits from fiduciary management as their Dutch counterparts. In that sense, fiduciary management will be adopted outside the Netherlands. What they have to determine is what blueprint fits them best.
5. The evolution of 130/30 products is primarily a response to the demand for more alpha within traditional benchmark aware equity strategies.
Investec Asset Management
Hendrik du Toit
CEO
1. No, but it is a useful strength to have. As clients become increasingly precise about their desired investment outcomes, structuring skills rather than off-the-shelf structured products will be in demand.
2. The real alpha is in the selection of an appropriate mix of market exposures. The mantra should be ‘beta diversification’ with healthy alpha on top. The commodities and resources area should now move from passive to genuinely active. The same holds for fixed income. Sophisticated clients should avoid employing yesterday’s successful trade tomorrow. The less liquid frontier markets are an underexploited area. Africa is an area of opportunity that remains off many institutions’ radar simply because they are trapped by their own (backward-looking) benchmark constructions.
3. Investment fads manifest themselves when market participants follow trends mindlessly. I am concerned about the current private equity fund-raising binge and the size of certain funds. The search for permanent capital by these businesses also tells me that they are less confident about their ability to deliver in future that in the past. Investors who are rushing to support today’s mega fund raisings should ask themselves whether today’s hot asset classes can escape the law of diminishing returns.
4. This concept is applicable to all mid-sized clients that have DB schemes. It could even be stretched to DC. Large, well-resourced clients may prefer to handle the ‘fiduciary management’ themselves.
5. The existence of these products is a reflection of the convergence that is currently taking place.
JanusIntech
Henrik Rox Hansen
Institutional director,
continental Europe
1. Not necessarily. We see as ourselves as being a component and specialist provider to structured product assemblers.
2. Certainly one of the areas will be 130/30-type strategies as I believe they are likely to be embraced by pension funds switching capital into them from their long-only allocation as they look for an efficient way to spend their risk budget.
3. It may sound obvious, but investment trends will last as long as they provide a solution to a pension fund’s needs. While all are born out of a need, some, however, may only be appropriate to the market cycle in which they were generated.
4. I believe it will. Fiduciary management is likely to be adopted in many European countries but particularly those with fragmented pension market with many smaller pension funds. ‘Fiduciary management’ is a natural step towards centralising knowledge and running pensions more efficiently by reducing the administrative cost for each contributor.
5. A little bit of both. 130/30-type products combine the best of both worlds but in a very transparent and efficient manner and therefore going forward the market demand is likely to gravitate towards these products. They are a natural extension for long-only managers to extend their alpha-generating capabilities by removing the long-only constraint to allow them to compete more effectively in the hedge fund space.
JP Morgan AM
Jens Schmitt
Head of European
institutional business
1. Asset managers that deliver state of the art solutions take advantage of all alpha sources. This includes derivates as total return swaps, eg in LDI. Furthermore, total return as the default option for defined contribution schemes requires scale.
2. Asset managers look at new ways to generate alpha within classic asset classes (for example, behavioural finance or statistical arbitrage) and using the new strategies and are finally increasing the use of alternatives such as infrastructure. It is not only these new sources that will change investor behaviour, but rather that investors actively intend to diversify alpha sources. Most rewarded will be diversified alpha sources that deliver continuous returns combined with low correlation.
3. Infrastructure will continue to play an important part in diversified portfolios. Given the financial issues of public authorities there are compelling opportunities in developed markets with ‘user-paid infrastructure’ projects, which include facilities that involve an explicit payment by the user, eg toll roads. Infrastructure development in emerging markets with huge potential like India and China should produce even higher returns than conventional real estate. LDI should also be a long-term trend as this will be required by regulators.
4. No answer.
5. We wouldn’t compare 130/30 and hedge funds strategies, instead they should co-exist. With 130/30 the investor still has 100% market exposure, which wouldn’t be the case with a classic hedge fund. Both strategies have a role to play in generating higher and uncorrelated alpha, depending on the risk profile of each individual mandate.
Mellon Global Investments
Alan Mearns
CEO
1. The specialist skills required for successful asset management are quite different to those required for investment banking. It is necessary to select the top talent from both camps to build best-in-class structured products.
2. Alternatives and absolute return strategies are likely to be important sources of alpha with a focus on GTAA, currency overlay, fund of hedge funds, market neutral and 130/30 strategies as well as absolute return equity and bond strategies.
3. Investments generating absolute return are here to stay while investments in art and wine are likely to be fads.
4. While fiduciary management can offer attractions to plan sponsors and investment managers, the tangible benefits to scheme members are unclear.
5. 130/30 products are an extension of long only enabling specialist asset managers, who have a successful track record of short selling, to offer clients added alpha-generating capacity without extending their market exposure. They have a valuable role in their own right but are inevitably part of the convergence between long only and hedge funds.
Mn Services
Wouter Pelser
Head of AM
1. The trend towards derivates and structured products, especially in the fixed income and credit areas, makes this more important. However, pension funds can build core portfolios efficiently without using structured products.
2. Excess returns will be generated in emerging markets that enact economic reforms. Long-term alpha will be generated in the BRIC countries and their satellites, with relatively high volatility short term. People make the difference - many talented people have set up absolute return products in a search for alpha. Pension funds need to focus on those. Corporate governance and engagement to enhance returns are being mentioned more often.
3. The transfer of a lot of mediocre fund managers to the absolute return area, and the construction of structured products too heavily based on leveraging and increasing credit risks, are both fads. Trends towards commodities (important for growth in emerging countries) and infrastructure will last.
4. This is expected, due to the integral approach to ALM, risk budgeting, asset management, reporting and risk management. However, it is important that the service provider has in-depth knowledge of a country’s specific pension fund environment.
5. When implemented in a bid to enhance efficiency in portfolio management it gives the opportunity to separate alpha and beta components and to hold long and short positions. A 130/30 equity portfolio is, in itself, a combination of both a beta portfolio and a long/short absolute return portfolio. We believe they narrow the gap between long only products and long/short equity hedge funds.
Morgan Stanley
IM
James Dilworth
Head of EMEA business,
1. Yes. Clients are increasingly looking for investment solutions tailored to their particular objectives. If asset managers are to meet this demand effectively, they must have the capability to deliver bespoke investment solutions, which means being able to design bespoke structured products, in particular portable alpha strategies.
2. In existing alternatives like private equity and hedge funds and newer asset classes such as commodities and currencies. Also, skilled managers in traditional asset classes can still deliver alpha. Ultimately, the search for alpha will become the key driver in the investment process, more so than traditional asset allocation decisions.
3. The creation of new asset classes, such as infrastructure and commodities, are positive long term developments for investors as they bring diversification and non-correlation benefits to the asset allocation mix. Trends like LDI will continue to develop, as schemes become more comfortable with the concept.
4. Yes. More investors are utilising fiduciary management as an efficient way to manage their portfolios. With new asset classes, structured products and a greater focus on active risk, many sponsors are realising that the investment process is becoming too complex for them to manage. Fiduciary management can provide significant value and allow investors to concentrate on their core businesses.
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