EUROPE - Asset management houses are failing to deliver the type of investment offerings pension funds actually want, according to an investment think-tank.
Speaking yesterday at the IPe-symposium web conference, Amin Rajan, chief executive of Create - a UK research think-tank for global investment products - told delegates while pension fund clients' needs have changes, producers of investment products have not kept up with change.
More importantly, he suggests asset management firm are attempting to push new concepts pension funds and trustees do not necessarily understand or want to invest in, instead of asking what it is they actually need.
"When we asked asset managers and plan sponsors, there is only one strategy where there is communality of demand and offering, and that is private equity so there is a big mismatch between what clients needs are and what fund managers say they demand," said Rajan.
"Pension trustees say they want to stay with the asset classes they understand and are quite happy to accept some hedge fund features. They are saying ‘give us a new generation of products but make sure they are good value for money, scaleable, and do not produce difficulties with valuations'. But it is possible to gain alpha level returns from traditional asset classes," he added.
That said, he is predicting a new series of products are set to hit the market in the near future as some companies are beginning to respond to calls for products which meet pension funding requirements.
"I think we are going to see an improved array of products emerging over the next three years," said Rajan.
"There is a lot of innovation going on at investment banks, for example, in decumulation and the production of ‘cafeteria' plans. What clients want is not what the industry delivers but risk return characteristics, less volatility, capital gains protected, the wrapping of products, but what they also want is a ‘cafeteria' plan and this is what asset managers are working to put to the market over the next 3-5 years," he continued.
One reason why asset management houses are not delivering what pension funds seek is the market is not changing as fast as fund managers believe, suggested Rajan.
According to the research conducted by Create, the development of pension fund investment strategies is moving in three stages, yet most pension funds are only at stage two, and fund houses therefore are perhaps thinking beyond the view of many pension funds.
"Pension funds are taking a step-by-step diversification route, starting with domestic bonds and equities, then moving to global bonds, equities, property as well as looking at less constrained 130/30 mandates, and straying further into the same territories they now cover," said Rajan.
"The third stage is generally searching for alpha. But most plan sponsors are only at the second stage. They are not interested in rhetoric of the asset managers in the third stage," he added.
The IPe-symposium delivered a series of online seminars and debates under the heading "Leading Edge Investment Strategies" to celebrate the 10th anniversary of IPE Magazine. Archived audio content of the day's symposium event, along with downloadable presentations, will be available via IPE next week.