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Impact Investing

IPE special report May 2018

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Top 400: Diamonds and duds - what will shine and what will fail?

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John Nestor reviews the results of the fourth AIMSE diamonds and duds poll and considers how views have changed

Once a year, AIMSE International invites asset managers, investment consultants and pension funds to indulge in a little crystal ball gazing, by asking them to predict which investment products will turn out to be diamonds over the next three to five years and which will be duds. The 2011 survey attracted 1,320 responses, providing a good picture of what those at the coal face of pension investment in the UK are thinking. This being the fourth such survey, we can also gain some interesting insights into how views are changing.

As the tables show, there was a great deal of agreement on the diamonds, with all three groups picking diversified growth, LDI and LIBOR plus/absolute return and fiduciary management. Comparing the 2011 results with previous years clearly demonstrates the lag between the introduction of new products and their adoption by pension fund trustees. For example, this is the first year that the pension funds have picked fiduciary management as a diamond, reflecting the extent to which it has become an accepted investment approach for trustees. A similar increase in popularity was enjoyed by this year's all-round top diamond - diversified growth strategies - which, again, did not even feature in pension funds' list of diamonds in 2010.

There is, however, disagreement between the three groups on the fifth diamond. Asset managers plumped for credit/EMD/high yield, which did not feature in their 2010 diamonds, but which found a place in the 2009 poll. Consultants' fifth pick is ‘other alternatives', although a small number of this group actually identified this as a dud. Unconstrained equity appears for the first time this year in the pension funds' list of diamonds, albeit in fifth place. This strategy has been favoured for rather longer by the asset managers, having appeared as one of their diamonds in 2009 and 2010 and only just failing to get into the top five in 2011. The consultants, however, are less convinced, never having voted this strategy into the top five. Looking at the raw data, it is interesting that the percentage of consultants that have supported unconstrained equity has been very similar in each of the past three years. This could indicate that just a few consultancy firms have consistently favoured this strategy, while it remained unpopular among the mainstream.

On the duds side, UK equity and 130/30 strategies take the bottom two places in all three groups of respondents. However, 130/30 is not entirely without its supporters, with at least one respondent in each group nominating it as a diamond. In contrast, UK equities was only selected as a diamond in the pension fund category and then by just one fund. Also, while all three groups see UK equities as a dud, the level of consensus is much higher among the asset managers, where over 85% voted for it, than among pension funds where it was chosen by 32% of respondents. Among managers, regional approaches for both equities and bonds remain out of favour, as do low-yielding securities such as cash and UK bonds. The consultants, on the whole, were less negative towards European and UK bonds than the managers. Among the pension funds, regional equities are clearly out of favour, but there is also a lack of strong support for global strategies.

Diversified growth - still a way to go
When the results of this survey were presented at the AIMSE consultants conference, a panel of consultants was asked for its interpretation of the outcomes.
The increasing popularity of diversified growth strategies was the subject of most debate. Stephen Birch of Hymans Robertson felt that a divergence of views was inevitable, as the product category was a "very broad church" including a wide range of investment strategies and client applications. He commented: "As some pension funds mature and become cash flow negative, downside protection and capital preservation are becoming more important, as funds cannot always afford to ride out market volatility. However, growth with limited downside is much easier to target than achieve." He was sceptical about some diversified growth funds providing a solution for absolute return generation, regarding them as little more than a re-packaging of market betas, with no real proven ability to preserve capital in bear markets. He remarked: "For many smaller pension funds, the diversified growth approach is a legitimate governance solution, but for larger schemes with existing allocations to a diverse asset mix, I think managers need to take a new, more considered approach to building multi-asset portfolios with less of the fund-of-fund approach and more of a holistic portfolio view, focused on stock selection."

Ciaran Mulligan at Buck Consultants said he felt that there was sometimes a slight disconnect between the needs of pension funds and the products offered by some asset managers. He commented: "While we are always looking for more sophisticated solutions, different pension funds tend to have individual requirements. As a result, there is sometimes a lack of attention given to the more traditional asset classes - equities and fixed income - by the fund management industry, which is still where a significant amount of pension fund money is invested." He went on to say: "There is no ‘one size fits all' diversified growth solution. Diversified growth strategies can provide a valid diversifier for smaller schemes. Larger pension schemes, however, should at least consider investing directly into alternatives which can be more transparent than a lot of diversified growth funds, meaning that whilst governance costs are increased, schemes understand the characteristics of the asset classes they are investing in."

Continuing on the theme, Lennox Hartman of Aon Hewitt added: "I would expect to see diversified growth funds evolving as asset managers gain a better understanding of what clients are trying to achieve with respect to return and risk objectives and what their time horizons are. We have seen this happen with LDI over the past five years as it has moved into the mainstream."

Andy Cheseldine of Lane Clark & Peacock took up the discussion from the point of view of a DC investment specialist. He quipped that in this context DC stands for "decidedly conservative" saying that there was a great deal of member inertia, especially as the cost of change was high. He added that the diversified growth approach was what many DC members believed they were getting.

In summary
• The fourth AIMSE diamonds and duds survey reveals that there is a great deal of consensus between asset managers, consultants and pension funds on which investment strategies will gain in popularity over the coming years.
• There is a clear shift towards de-risking and downside protection, away from strategies designed to produce pure growth.
• The list of duds shows that regional assets have gone out of favour, with the shift towards a global view.
• While respondents agree that diversified growth strategies have a strong future, it is clear that these need to develop to meet the increasingly varied demands of pension fund clients.

John Nestor is chairman of the Association of Investment Management Sales Executives (AIMSE) International

 

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