Top 400: Leading soundbites

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IPE questioned CEOs, CIOs and other senior figures in investment management:

1. Why should the largely decumulating defined benefit European pension market expect the same level of strategic attention from the asset management industry as growing pension markets in Asia and Latin America?
2. Emerging markets are seen as likely to be the main generators of global GDP growth for the next decade or more. How much exposure should European pension funds have to emerging markets and in what form?
3. Regulators are pushing pension funds into large bond weightings at a time when yields are at historical lows, and distorted by government interventions through QE. If you were running a family foundation, what exposure would you have to bonds, and how would that differ from that held if you were running a corporate or public pension fund?
4. Is there something fundamentally rotten in the financial sector that led to the crash, and have the underlying issues been remedied?

Martin Gilbert
Aberdeen Asset Management

1. The primary reason is that European pension funds are existing, and often long-standing, clients of asset managers and we can play a vital role in the strategic shift from growth to income distribution as more and more people retire. While there are opportunities in the largely infant pension markets of Asia and Latin America, asset managers cannot neglect Europe's pensions market.

2. This is of course dependent on the nature of the fund and its maturity. But funds should certainly consider diversifying the growth element of their portfolios to gain exposure to emerging markets. Many have already done this by allocating to emerging market equities, but there are also opportunities with emerging market corporate bonds and property, which they should consider.

3. Pension funds typically use bonds for liability matching whereas family foundations use bonds as part of their capital preservation/absolute return strategy. Therefore I would have significantly less exposure to bonds overall, but in particular to developed government markets that are most interest rate sensitive and represent little value. One very interesting opportunity that has happened in the last 18 months or so is the de-coupling of the interest rate cycle, particularly in Asia but also other emerging regions. This makes these areas much more interesting now and when considering the likely continued improvement in credit status of many issuers and indeed the prospects for currency appreciation, I would have some degree of exposure here.

4. At the root of the crisis was a desire to construct ever more complicated products, reliant on huge amounts of leverage. The aftermath has resulted in renewed demand for simple, transparent products, a heightened awareness of risk and return and increased regulatory scrutiny. While all this does not mean there will not be another crisis, lessons have certainly been learned.

Joachim Faber
Allianz Global Investors

1. While there can be little doubt that the pensions markets in emerging Asian economies will grow at a faster rate than in Europe, one should also distinguish between the size of these markets. A recent study showed that, by 2020, the pensions markets in Europe and the US will still dwarf those of other parts of the world. Indeed, in co-operation with the life businesses within Allianz, we see a tremendous opportunity to provide more integrated retirement solutions in the most mature markets such as Europe.

2. Emerging markets (EMs) will clearly be the main economic growth drivers in the coming years due to strong productivity gains. However, the latest research also shows that - contrary to our conventional wisdom - there is no proven correlation between high GDP growth and stock market appreciation. With EM valuations, on average, still reasonable, adding to EM in a global portfolio makes sense at this juncture. But for an EM strategy, EM bonds and currency also need to play a role beside EM equity exposure.

3. A family foundation has the important advantage of not being subject to financial services regulators. Particularly now, this represents a remarkable advantage over, for example, the insurance industry. In a rising interest rate environment like today, a family trust should have only short-term or real return bond exposure. Also speciality bond classes like EM local currency and high-yield bonds are recommendable. In the current environment, regulators would penalise insurers for such an optimal asset allocation with an inappropriate risk capital requirement.

4. While one could surmise that short-term thinking combined with unsustainable practices, policies and behaviours ultimately caused the global financial crisis, it would be wrong to lay all blame at the financial sector, or tar all parts of the financial services industry with the same brush. That said, there are lessons to be drawn for all parts of the industry. For instance, asset managers should undergo a shift in the way they conduct business. Our business is not about pushing specific products; it is about partnering with our institutional clients and providing long-term solutions.

Yves Perrier
Amundi Asset Management

1. European, Asian and Latin American pension markets face different types of challenges due to different regulations and different economic and demographic situations. In Europe, most pension funds are subject to profound regulatory changes that will tend to rebalance them, but they remain important as far as asset managers are concerned. Their role is to assist them in the evolution of their asset and liability management, particularly when considering their size and importance in the equity and bond markets.

2. Given the growing weight of emerging markets in the world economy, it is difficult not to have an exposure to this asset class. Today institutional investors are underweight in their exposure to emerging markets with only 6-7 % of their assets dedicated to emerging markets via equities or bonds. By 2030, the market capitalisation of emerging markets is expected to reach up to 50% of the world market cap, with China being above the US and twice the size of Europe. This gives a broad idea of their potential regarding institutional portfolios. The amount of exposure to emerging markets does however depend on the pension fund regulations.

3. It depends on the foundation's objectives. Given market conditions, in the case of an individual portfolio without liabilities, we would limit any exposure to bonds whose yields are very low and subject to important risks in the coming months. But if the foundation or family office has liabilities to match (maybe indexed on inflation), nominal bonds (or even inflation-linked bonds) remain an important asset class to consider.

4. The financial crisis arose from excessive debt at all levels of the economy and also from the development of uncontrolled complex financial instruments. Governments' and central banks' determined action was able to curb its effects, and efforts are currently under way to better regulate the system. But the level of public debt and the opacity maintained in some areas of the finance industry remain strong risk factors.

AXA Investment Managers

1. Given the advancements in longevity and the impact it has on pension income, design and implementation of successful decumulation strategies for defined benefit schemes have become one of the most complex areas of investment. Being one of the most important players in the long-term savings sector and given our expertise, we have a responsibility to provide the right solutions to clients grappling with this challenge.

2. Bearing in mind individual constraints and liabilities, it is not unreasonable for investors looking for medium to long-term growth to allocate 20% or more to global emerging markets. Exposure of growth assets to the emerging markets theme should apply across all asset classes from emerging market debt to equities and alternatives such as infrastructure.

3. Even investors worried about value in conventional bonds can still find value in certain areas of the fixed income market, such as in the high-yield sector. So even in the case of a family foundation, there should be exposure to certain aspects of the fixed income asset class, whilst with a pension fund risk considerations will also demand a weighting to more traditional segments such as government bonds.

4. The financial sector is no different to any other cyclical industry. It suffered because there was an over-reliance on risk models that had worked well in the context of normal market behaviour but failed in abnormal circumstances. Most players, from the banks to the regulators to the rating agencies, placed too much faith in the risk models. Initiatives taken by all stakeholders since the crisis go in the right direction to address the issues faced by the industry. But the remedy is complex and will continue to evolve.

Marino Valensise
Baring Asset Management

1. First, the European pension market is very large. The rate of growth in Asia and Latin America might be faster, but European pension funds are responsible for a very significant pool of assets. Secondly, European DB schemes are ‘internationalising' their exposure, in particular reference to equities.

2. It will depend on the individual circumstances of each scheme, their funding status and appetite for risk. In general, it is evident emerging economies are responsible for a growing share of world GDP and equity market indices. In terms of our long-term institutional asset allocation, we suggest a 15-20% weight to emerging equities and a 10% allocation to emerging bonds in local currency; our perception is that European pension funds are far from this type of exposure.

3. Management of a defined benefit pension fund is linked to its liabilities, which are bond-like. For fully funded schemes, some immunisation and LDI strategies are appropriate. Total return-oriented investors such as family foundations approach asset allocation in a different way: taking a strategic view on return and risk, and taking historical correlations into account. Traditional G7 government bonds should not be an important allocation here, as the bond part should be focused on emerging bonds denominated in local currencies.

4. Shareholders of banks still have no real control over the management teams, who remain the true ‘owners' of these firms. The creation of shareholder value is still subordinated to the creation of value for management and staff: until this set of priorities gets inverted, distortions will remain. The regulatory and compliance rules are increasingly complex while resources for surveillance remain scarce and disproportionate to the task.

Charles Prideaux
Head of institutional clients, EMEA,

1. The European DB market is significantly larger and will remain so for years to come. Furthermore, the scale of challenges it faces deserves asset managers' focus in terms of developing more durable and comprehensive solutions for pension funds. These need to combine capital-efficient management of liabilities and other risks with appropriate allocations to growth assets. Managers also have a key role to play to help closed funds manage the end-journey in a cost-effective manner.

2. GDP growth does not necessarily translate into superior earnings growth for emerging market assets, hence why for many asset classes the use of GDP weighted benchmarks is not appropriate. Furthermore, many of the companies listed on developed markets generate a growing proportion of their revenue from emerging or frontier economies. We advocate that institutional investors ensure that their overall (direct and indirect) exposure to emerging and frontier markets across equities, debt and alternatives reflects those markets' superior growth potential.

3. Family foundations and pension funds have fundamentally different goals, time horizons and liabilities. Nevertheless, in both cases the general principle applies that all investment should be based on investors' specific requirements and the level of risk they are able or willing to take to meet these requirements. That said, even a closed pension fund that has to de-risk, will still require a meaningful exposure to growth assets as many risks cannot be hedged accurately. The challenge here is to use the reduced risk budget to maximum effect.

4. Failure in risk management was at the heart of this crisis. While each market dislocation is different, we believe that this crisis taught us some valuable lessons in risk management. This includes the importance of conducting your own credit analysis and the need for hands-on' due diligence when investing in securitised assets. Investors have also become painfully aware that markets should not be allowed to dictate your risk level and that liquidity is not a given and requires contingency planning.

William de Vijlder
CIO Strategy and Partners
BNP Paribas Investment

1. In Europe one clearly witnesses a shift from DB towards DC, implying that the combination of a high savings rate, a huge demographic challenge, and unfunded first pillar systems, makes Europe an attractive market for asset managers. Moreover, Europeans, though very internationally orientated, do have a home bias, so the pool of new assets to be invested every year is considerable. Growing markets in Asia and Latin America provide attractive business opportunities but that does not take away the attraction of European markets from an asset management business development perspective.

2. We believe that investors are underinvested in emerging markets both in equities and in fixed income. Depending on the risk profile of the investor we advise investors to invest 25% of their portfolio in emerging markets, both in equities and in fixed income, but the majority in equities. Strong GDP earnings growth should support emerging market equities relative to developed market equities.

3. We believe that bond yields will rise over the coming years and that investors will generally not be rewarded for holding duration risk. This implies that investors should lower their duration and switch from longer duration into shorter duration bonds and partially to absolute return strategies. A corporate pension fund has to mark to market its liabilities and therefore holding long duration bonds is seen as a hedge against the liabilities. This implies that the duration of a corporate pension fund should be longer (to mitigate the mismatch). Still in line with the foundation, a pension fund should hold a lower duration than it would normally do - ie, slightly decrease the duration matching portfolio.

4. A vast range of factors -- covering various economic agents, developments in global financial markets, in the real economy (the ‘great moderation'), and in sentiment (investors chasing returns targets which were too high) - all need to be considered in explaining the causes of the crisis. The increased focus on and tightening of regulation, reducing leverage, increasing transparency, imply that at least some of the underlying issues have been thoroughly addressed. Let's keep in mind, however, that a succession of booms and busts has existed for many centuries so we had better start thinking about where the next problems might surface.

Robert Parker
Senior advisor
Credit Suisse

1. Asset managers will adopt a ‘barbell' strategy of focusing on their core markets in the US , Europe and Japan but looking for growth in emerging markets. Given the demographic profile, asset allocation will concentrate on equity management in emerging markets and fixed income LDI strategies in developed markets with an element of diversification into alternatives.

2. Exposure to emerging markets can break down to firstly investing in developed equities where companies have high levels of profits driven by emerging markets, secondly into publicly listed emerging equities, thirdly into ETFs, fourthly into emerging hedge funds and finally into alternatives such as real estate, infrastructure and private equity. Given that emerging economies account for 30% approximately of world GDP, this percentage level should be the minimum.

3. A family office typically has no clear liability profile whereas most DB pension funds have reasonably visible liabilities. Liability matching for pension funds is logical but, to enhance performance when bond yields are low, alternative investment, particularly into ‘bond type' asset classes such as infrastructure and real estate will increase. For family offices, the case for bond investment is very weak.

4. The financial crisis was primarily caused by over leverage and poor risk management at a time of loose regulation. Regulation has been significantly tightened, leverage reduced in the banking system and risk management improved. However, the sovereign debt problem still needs further work and bad debts in the banking system, particularly in the real estate sector, still need to be written off. Regulators are currently focusing on governance and shadow banking issues as well as ‘non-traditional' ETFs.

Nikolaus Schmidt-Narischkin
Managing director
DB Advisors

1. To call the pension schemes of Europe ‘decumulating' is taking an extremely long view. These markets are currently still growing and innovative solutions to manage risk, optimise governance and to optimise investments for different plans across Europe are in high demand. Multinationals are increasingly taking a global view of their pensions and look for suitable platforms to manage those assets. Europe is well poised to host those pooling platforms and in this context the European DB assets will be the nucleus.

2. Emerging markets (EMs) certainly are drivers of growth going forward but distinctions between emerging and developed markets (DMs) will become blurred. It will become harder to quantify ‘adequate' EM exposure as some areas like local EM bonds are still rapidly developing. We recommend a diversified approach including EM equities, bonds (local and hard currency) as well as EM-focused alternatives. It should be highlighted that even among traditional DM asset classes there are attractive ways to position oneself towards EMs.

3. The goals of family foundations and pension funds differ and the former strive to protect the real value of the assets over generations. Without a default asset class like long duration bonds they follow a diversified approach and, not subject to regulation, they may avoid currently dangerous high allocations to bonds. A funded pension fund's risk-free benchmark is the replica of its liabilities. With yields at historic lows and inflation risks increasing only few will fully replicate, lowering duration and diversifying towards other risk premia instead. But the individual risk budget/strategic asset allocation will always be linked to the liability side and thus tilted towards bonds.

4. Assigning one-sided blame for a situation that might accompany us for decades is shortsighted. The original financial crisis was triggered by excessive risk taking - from both financial institutions and investors. This might have been confined by a different set of incentives, stronger regulation and awareness of central banks and governments. It was not. On the side of financial institutions a lot has been set in motion by introducing ever-stricter risk management and systems that incentivise sustainable business. Apart from that we have seen little fundamental change so far. For a sustainable solution, all stakeholders should work together to create a better supervised and regulated system.

Naïm Abou-Jaoudé
Dexia Asset Management

1. A pension is a promise, and that promise has to be kept. Working men and women should not have to worry about their retirement security after years of service. That is why we believe the decumulation phase to be as important as the accumulating phase during the whole retirement provision life cycle. What's more, the decumulation phase leads to much more demand for individualised financial services. As such, it would be very unwise, both from a philosophical and from a commercial point of view, to devote less effort to this market segment.

2. Emerging markets will remain the main growth contributor for the years to come. Growth will be superior as domestic demand is poised to increase at a rapid pace for the forthcoming years. Exposure should be increased or maintained at an above-average level. This can take multiple forms and investors should always have a diversified approach when looking at emerging markets. This is also true in terms of regional approach.

3. Pension funds and family foundations serve two very different purposes. Whereas the main objective of the latter is more qualitative, the objective of a DB pension fund is very quantitative: to pay the retirement benefits as promised. Since defined retirement benefits are long-term cashflows, a pension fund's liability structure more closely resembles the structure of a bond portfolio than a family foundation does. As such, pension funds have higher bond allocations than family foundations.

4. Within the financial sector, excessive leverage amplified the disastrous consequences of extreme risk taking. Suitable regulations for bank capital and leverage ratios, just as using more robust statistical methods, will improve the sector's solidity. But to address the fundamental issue of short-termism, technicalities alone do not suffice. Banks, asset managers and investors alike should learn to focus on sustainable value creation: adopting a long-term horizon for performance appraisal, improving corporate governance, taking an interest in the long-term viability of investee companies.

Alain Grisay
F&C Investments

1. Whilst it is clear that defined benefit schemes are in decline across Europe, this is still an important and very sizeable market. Asset managers have an important role to play in bringing appropriate solutions to pension schemes which help them address some of these challenges, in particular as they seek to match their investment strategies to their future liabilities. We therefore believe there are opportunities for asset managers in both developed and emerging markets.

2. The higher growth outlook, stronger fiscal position and growing international reserves should allow for currency appreciation of many emerging market currencies relative to the dollar and the euro. Strategically, we believe allocations around 8-12% to emerging market equity (unhedged) and 5-8% to emerging market debt (external and local) are currently suitable for balanced portfolios but ultimately the appropriate allocation will be different for each pension scheme.

3. Structural allocations to government debt in a family foundation portfolio should be minimal at this stage of the cycle. It would be preferable to allocate to corporate credit where spreads remain relatively high and the risk premia are above long-term averages. Most pension funds are required to allocate a sizeable proportion of their assets to government and corporate bonds regardless of rates or credit cycle. The challenge is that high bond allocations and reducing investment in growth assets means giving up the expectation of higher long-term returns. One solution is provided by investing in equity-linked bond funds, which allow pension schemes to hedge their liabilities while still providing exposure to equity market returns.

4. "Fundamentally rotten" is an overstatement, but we still have a culture that defends over-aggressive risk taking on the grounds that "everybody else is doing it", and struggles to grasp the systemic implications of its actions. The so-called remedies we've seen to date - risk management, board reform, capital requirements - have all been technical. What has yet to happen is deep cultural reform and that will take time.

Saker Nusseibeh
Hermes Fund Managers

1. I think in time we will see a shift towards Asia, this simply being a matter of demographics and wealth, which is why the US continues to remain an important market. However, due to the sheer size of the European pension market, it will continue to remain central to asset managers for quite some time.

2. European pension funds should have a structural exposure to emerging. Furthermore, pension schemes should also be wary of the current liquidity-driven valuation bubble developing in some emerging markets. Finally they should consider investing through indirect means - ie, through developed country companies with high exposure to emerging economies - as well as direct means. In absolute terms, I would say modestly overweight the capitalisation weights of these markets on a strategic level, but be mindful of entry points as some of the exposure could be debt.

3. I think the right way to consider this question is to look at the function of bonds in a portfolio. At this level, one knows yields are likely to go up. Moreover, one can construct an argument to say that default risk, or at least restructuring risk, in sovereign bonds has increased and this would argue for a different assessment of their risk profile. Sovereign bonds are likely to become more volatile in the coming decade than they have been in the previous five decades. So the question then becomes how does one consider the function and volatility of a large corporate with exposure to developing economies, and as such to growing GDP, that pays an increasing dividend stream in the construction of a portfolio, in relationship to a sovereign bond?

4. Yes, asset managers have abrogated their responsibility to their clients and to society by pandering and selling products on ‘caveat emptor', rather than taking a holistic view of the industry and making their views known.

Barbara Rupf Bee
Global head of institutional
HSBC Global Asset Management

1. Although decumulating, the broader European DB pensions market, in terms of asset allocation, is one of the most diversified, which presents vast opportunities for introducing newer asset classes such as emerging market debt, emerging market inflation linked bonds, emerging market regional capabilities and alternative funds. Combined with its maturity and considerable size, this means it is one of the most attractive markets to focus on as an asset manager, presenting a wealth of opportunities.

2. Depending on the risk profile, I would suggest emerging markets represent a quarter to a third of an equity allocation given their growth potential. In addition to EM equities, an allocation to EM debt should also be considered to broaden the scope and diversification of the fixed income portfolio. For more evolved investors, some exposure toward more specialist asset classes such as New Frontiers or single country allocations like Indian equities could be considered in order to add further diversification and some spice.

3. Compared to the pension market, the family office/foundation area usually has fewer prescribed or regulated investment guideline to follow and therefore has been quicker to exit bonds and to focus on equities and alternatives. In general in regard to fixed income, although we are not enthusiastic about the returns on corporate bonds in the developed world, a higher yield can be achieved through holding a significant weighting to emerging market bonds, which have proven a significant diversifier in the last 12 months.

4. I cannot comment on the financial sector as a whole but in terms of our position as an asset manager we have for a long time demonstrated a high level of prudence when working with clients and this is continually evolving. Pension schemes increasingly demand a level of due diligence and we are happy to meet these requirements.

Patrick Grauwels
Head of institutional
KBC Asset Management

1. Why shouldn't they? The European pension market is an important target group, characterised by actuarial underfunding, in a challenging environment. European pension funds have a social vocation involving each of us and they earn more than strategic attention alone.

2. For structural and tactical reasons we advocate a substantial overweight of emerging markets exposure at 20% compared to an MSCI AC weight of 13%. We recommend to achieve this overweight mainly through equities and corporate bonds, preferably investment grade and excluding financials as these tend to profit to a lesser extent from excess growth.

3. Our analysis tends to implement a liability-driven investment strategy (or a multi goal based investment plan for a family foundation) as a solution for a possible mismatch risk. A lesson learnt is that fixed-income instruments with longer durations and high credit ratings (AA or better) offer a superior protection when stock markets are tumbling. With LDI the negative effects of rising interest rates are reduced substantially.

4. The origin of the crash was primarily the exploding business of off-balance credit, leading to intransparant and non standardised products and ‘careless' credit controls. What has been done so far? Basel III and Solvency II introduce besides capital and liquidity requirements a number of stringent rules to master risk exposures in the financial industry. However it is debatable how far regulation should or should not go.

Paul Gerla
Kempen Capital Management

1. From a general point of view, growing pension markets can of course learn and benefit from the experiences in Europe. The decumulating DB market in Europe does not necessarily mean that these markets will not be interesting to the asset management industry in the years to come. Apart from the fact that the asset bases will remain large (in absolute terms) for years, asset managers can also benefit by developing innovative solutions that address the changing needs of more mature pension plans.

2. As always, it very much depends on how much is priced in. We always ask ourselves the question: ‘Are we being rewarded for the risk?'. Irrespective of the market, we always look for the most promising opportunities. Sometimes these can be found in equity markets, sometimes in fixed income or other markets. Today perhaps in emerging markets and tomorrow in developed markets. Currently we believe emerging market debt is relatively expensive, whereas emerging market equity still offers opportunities. And although many investors still think in terms of asset allocation and regional weights, we prefer a risk budget based approach. This approach is more flexible as risks attached to certain assets are not static but will be dynamic over time.

3. In our opinion, government bonds are not the risk-free asset class they used (or were perceived) to be. As we do not believe that government bonds at current yields are providing attractive expected returns for the risks associated, we advised our clients already at the end of 2010 to underweight government bonds (and more extremely so if they are not constrained by regulation).

4. We are of the opinion that not all lessons that could or should be learnt from the crisis, have actually been learnt. Global financial markets are and will be tightly coupled systems. Co-ordination in regulation will only result in more and more institutional investors being forced to do the same things at the same time. With Basel III and Solvency II we therefore have to prepare ourselves for new and potentially even larger crises.

Mike Craston
Managing -director, institutional business
Legal & General Investment Management

1. The European DB market remains sizeable and continues to require attention from the asset management industry - especially because it is decumulating. As schemes focus on closing, they are increasingly looking to structure their asset allocation to more closely match future liabilities (de-risking). As a result we have seen increasing demand for sophisticated fixed income solutions (particularly credit) and derivative-based risk management strategies. As different dynamics shape the pension markets of emerging economies, the solutions require a different focus, yet equal strategic attention.

2. While history has shown that asset returns and GDP growth are not necessarily closely correlated, emerging markets have shown resilience in recent years. Strong performance has been helped by massively improved external finances and better macroeconomic policy frameworks. Inflation is a serious challenge in the near term for the region but further out growth prospects remain highly favourable. The best allocation to emerging markets depends on the risk/return profile of the particular scheme. However, our baseline assumption would be an allocation to emerging market equities of close to their market weight (10-15%) within global indices.

3. QE has created a source of unusual demand for bonds, but government fiscal deficits have led to a highly unusual amount of supply. For DB schemes, successive legislative changes and more closed schemes means there is often little upside for trustees to take investment risk, as there may not be any additional benefits to the scheme members. Since this is not the case for family foundations, this sort of entity may reasonably decide to have less in bonds and more in riskier assets compared to corporate pension funds.

4. The crisis was caused by excessive private sector debt growth artificially inflating asset prices. A positive development since, however, is the private sector emerging stronger, with healthier balance sheets. Unfortunately, the same isn't true for public sector finances. Many countries' fiscal positions were already dire before the crisis and now governments are being forced to address soaring deficits earlier than planned. One of the biggest dangers is financial markets losing confidence in governments' ability to make these politically unpopular changes.

Peter Schwicht
Head of institutional business, continental Europe
Head of asset management, Germany
JP Morgan Asset Management

1. The European pensions market consists of some very large funds, which have very different issues from those of newer pensions markets. The focus on risk management as well as return generation means different skills are needed in more developed pensions markets, but strategy is still just as important.

2. Emerging markets are seen as likely to be the main generators of global GDP growth for the next decade or more. How much exposure should European pension funds have to emerging markets and in what form? Whilst the focus is on country growth, it is important to recognise that investments are made in companies and governments, not the economy. Pension fund exposure to emerging markets depends on the risk preferences of a scheme, but however much the level of investment, local knowledge is vital so investing passively is not ideal. Hard currency emerging market debt can provide diversification from local fixed income and local current emerging market debt and emerging market equities can enhance real returns.

3. The level of investment in bonds differs depending on spending profile, risk appetite and objectives, but it is important to understand that bonds play an important role in controlling risk in all pension schemes. However, the nature of liabilities is different between pension funds and foundations, who have more flexibility over the extent to which proceeds of a foundation are spent, meaning they may have a lower allocation to bonds.

4. The main driver behind the crash was the availability of cheap credit, which exacerbated a number of problems including housing bubbles and the mortgage securitisation crisis. Since then credit demand has collapsed though money remains cheap. Regulators are working to ensure such occurrences do not happen again, but whether regulation alone can mitigate such bubbles remains to be seen.

Pascal Voisin
Natixis Asset Management

1. The European defined benefit market is certainly a faltering market, mainly due to the switch towards defined contribution schemes. For many reasons, however, it is still a strategic market for major European asset managers: it is the most mature market, the most organised, where problems in connection with asset allocation, asset liability management and asset diversification have developed the most. It is also one of the leading markets since it is operated by major international consultants. And, what is more, it is still a major market in terms of size.

2. A traditional behavioural bias overweights portfolios in domestic assets. If we consider the emerging GDP growth superior to the developed world for the next decade, we must significantly expose strategic allocation to this area. In the MSCI World All Countries index, the emerging block represents 14% of total capitalisation. We believe this relative weight to increase, as the emerging growth takes a bigger and sustainable place in the global growth. Hence, the fact of holding between 20 and 25% of assets and forecasting a convergence between the capitalization of today and the level of expected growth help prepare the portfolios to that future world. Even though some developed companies will also benefit from that emerging market dynamic.

3. In case of a family foundation, the key challenge is to generate the annual budget to ensure the endowment to cover its expenses. This challenge should be achieved through bond investments. For the remaining assets, capital appreciation in the long run should be seeking through a widely diversified strategic asset allocation. For pension funds, liabilities are discounted according to a specified rate. To a larger extent, to secure the solvability of the scheme, some bond investments (both in nominal and real rates) will be used to immunise the liabilities. If, this has not been achieved in the past, the market timing seems bad (because of low rates), but the rationale dictates nevertheless to consolidate the assets and liabilities as much as possible.

4. I do not think finance is a sector or an area of business that has any fundamental problems. The crisis, however, did bring to light some risky behaviour patterns and occasionally excessive complexity that makes financial offers opaque and which can lead to rejection. We are developing a more responsible kind of financial offer, more in touch with social and environmental consequences, especially with regard to SRI management.

Joe McDevitt
Managing director
PIMCO Europe

1. Over the short to medium term, the sheer scale of funded pension assets in Europe will continue to attract significant strategic attention from asset managers. The demise of defined benefit pensions in Europe may be inevitable, but it will be another 10 or 15 years before the scale of the actual business opportunity in Europe is eclipsed by scale pension opportunities in developing economies.
an pension funds should incorporate meaningful exposure (between 20% and 30% would be meaningful) to developing economies' capital markets into their strategic benchmarks. While allocation to EM equities, currencies, government and corporate debt should all be part of a fund's strategic benchmark, the actual allocation at any time should be based on relative valuation levels, both within EM capital markets and compared to valuations in developed economies' capital markets.

3. Given the nature of private pension funds' liabilities, bonds have a natural role to play on their balance sheets, particularly when regulators deem the public interest best served by strategies which limit any tail-risk shortfalls which might have to be made good by the taxpayer. If I were running a family foundation today, however, I would carry little if any ‘hard' duration, as the risk of rising yields is too great, and focus on spread sectors and absolute return strategies.

4. Badly misaligned incentives in the financial sector greatly contributed to the crash when a host of ‘perfect storm' conditions came together. Regulators, economic policy makers, and risk-blind investors also contributed to the crash. While many of the obvious incentive problems in the financial sector have been addressed, I worry about generals fighting the last war. Significant global economic imbalances and problems remain, and the next crisis could arise in a different way.

Werner Niepel
Senior adviser to the Board
Raiffeisen Capital Management

1. Finding solutions to solve the problems of the DB European pension market is a real challenge for asset managers but could be worth while for them to look at more. Improved risk management integrated with asset-liability solutions would be the key.

2. Depending on the individual capital market and fundamental situation of each emerging market, European pensions should be allowed to invest but watching the liquidity and risk situation of these markets. Some emerging market countries are already in a sound fundamental position and an even better choice than developed countries.

3. Without knowing the requirements and risk appetite the answer is difficult. In any case the bond exposure must be selected very carefully now. Generally, family offices will take more risk. The regulations of the pension funds are obsolete. Fixed income benchmarks need to be revised.

4. The massive leveraged markets will need a lot more years to correct the exaggerated situation. Banks are coming under pressure from two sides, one is the European government debt situation and on the other hand are capital requirements like Basel III.

Udo Frank
Global CEO

1. Several key drivers determine the attractiveness of a market, demographics or asset growth rates are only two. Total assets under management and, more importantly, those managed by third parties are highly relevant; pension markets in the developed world will continue for quite some time to command the biggest asset pools. Furthermore, the degree of openness, fees, the legal and regulatory environment and associated cost, and the degree to which clients are searching for innovative solutions are other important drivers.

2. A diversified strategic exposure to growth in emerging markets should consist of equities, local currency fixed income, real estate and private equity in these countries. Furthermore, commodities and investments in companies in the developed world that benefit to a significant degree from emerging market growth are important components. Depending on the overall risk budget and liquidity constraints of an investor, the exposure overall should be above 20%, more in the direction of 35-40%.

3. As a private investor, developed world sovereign bond exposure could be reduced to zero with the exception of liquidity needs being covered by T-bills. A yield pickup via quality corporate credit and investments in emerging market currency paper would round out a 30%-ish fixed income exposure. The agency issue in combination with regulatory and accounting rules guides corporate or public pension funds to a majority of investments in fixed income and matched to liabilities, above 80% as a guidepost.

4. It is extremely challenging to design a regulatory oversight regime that allows creativity and supports growth while at the same time being capable of clamping down when systemic risks bubble up. While some lessons have been learnt, it would appear that a lot of work still remains to be done to return the financial system to health.


Patrick Disney
Managing Director, institutional


1. The European market is mainly focused on defined benefit whereas emerging markets have embraced defined contribution. Pension sponsors in Europe continue to need help in implementing de-risking and liability management strategies. Fiduciary management can help them achieve this. If an organisation is strictly providing asset management services only, then the European pension market may not be the most lucrative as these services alone do not provide the solution that pension sponsors need. 

2. Emerging markets have been an attractive asset class for pension schemes. We have seen modest allocations ranging anywhere between 1-15% of the portfolio, depending on the pension's risk appetite. This includes equity and debt with an allocation consistent to the pension's overall equity versus fixed income distribution. It is important to note that asset allocation within a pension portfolio should be customised to the financial strength of the organisation and the long-term goals of the pension scheme. 

3. This depends on the funding level of the pension. A well-funded pension tends to want a higher allocation to bonds and other fixed income instruments as part of a de-risking strategy. These schemes can afford to give up return in exchange for hedging liabilities. Poorly funded schemes still need higher returns to help improve funded status and therefore tend to have a smaller allocation to bonds. Foundations are different in that they are focused on the long-term, in perpetuity, and tend to maintain a portfolio designed to deliver the required annual returns, resulting in a relatively low allocation to bonds.

4. Definitely not. One of the major issues behind the crisis was the collapse of the US sub-prime mortgage market and the global use of financial products and instruments tied to these loans. These issues have been resolved through regulation and better business practices in issuing credit. The investment management industry as a whole now has an even greater focus on regulation, risk management and transparency of underlying investments, which has resulted in significantly improved capital markets over the past two years.

Keith Skeoch


Standard Life Investments

1. Europe will remain attractive because of its size, its prestige, and the opportunity for fund managers to offer good DC schemes to the participants leaving DB schemes as these expire.

2. An investor's exposure to global GDP growth matters a lot less than their exposure to asset returns. Our role is to identify how, where and when the returns will alter in different countries, depending on long-term trends, which may be helpful, but also short-term cycles, which may be less helpful. We can help advise what the strategic weighting of a scheme should be to emerging stock markets (they represent about 13% of the global index) but our analysis strongly suggests that there are also opportunities in companies in developed markets with a strong exposure to the emerging world. It is the exposure of the overall portfolio to emerging markets that will help returns rather than exposure to individual country indices.

3. Non emerging-market sovereign government debt offer the prospect of a poor risk-adjusted return compared to other asset classes. Investment grade corporate and high-yield debt is preferred along with equity dividend income strategies and real estate to meet the income needs of both family foundations and corporate and public pension funds.

4. The financial sector is not rotten and it is important that it plays its role in financing recovery. The underlying issues have not been remedied. This is partly because each cycle of bubble and bust reflects simple human behaviour, fear and greed. It is also because the financial crisis was a global one, and therefore requires global solutions. Co-operation amongst politicians in so many countries has proven more difficult as the crisis recedes into history.

Peter Bänziger



1. Although Asian and Latin American pension funds are generally growing faster than European ones, the latter still represent a significant part of global pension assets. In addition, given demographic development and state of public finances many traditional defined benefit markets are looking to defined contribution as the future of pension fund provision. This in turn, will increase beneficiaries' focus on investment return, which offers new potential for the asset management industry.

2. In the longer run, emerging markets' share of global GDP would be a good proxy for their share in asset allocation. Given liquidity constraints, significant public ownership of companies and political risks in some regions a share of roughly 20% of assets seems reasonable. These should be held in equities, bonds, real estate and other alternative asset classes like infrastructure or private equity.

3. The optimal asset allocation depends on the structure of a pension fund. But given the current environment, with historically low interest rates, increasing inflationary pressure and eroding public finances, bond allocation should be kept at 10-20% of assets with a focus on corporate bonds and emerging market debt. For a family foundation it will be easier to avoid home bias given less political interference and regulation.

4. Some of the main drivers of the recent crisis were low interest rates, high leverage ratios and explicit or implicit state guarantees in the financial sector. All of the above led to excessive risk taking culminating in the near-meltdown of the financial system. So far, only the leverage issue has been seriously addressed with the current discussion of increased bank capital ratios.

Todd Ruppert
Investment Services

T. Rowe Price International

1. It's still a large market with sophisticated needs. A decumulating DB market does not imply that opportunities are scarce for investment managers, it means the opportunities may be different. Our challenge, whether serving client needs in mature or emerging markets, is to align our product offering with client demand, which is continuously evolving. The mature segments of the DB market will get attention from investment managers that possess the enabling capabilities necessary to craft needed solutions.

2. Bracketing the range of possible outcomes under different regimes is one way to guide a client's level and form of EM exposure. A risk exposure based EM classification includes developed and emerging equities, credits, infrastructure, commodities, and more. The return drivers on EM factor risk are domestic and global economic growth, inflation, currency, and more. Understanding how different model portfolios behave under different economic scenarios will answer the question regarding how much and what form a client's EM exposure should take.

3. A low bond allocation for the foundation and high for a fully funded pension plan because each is solving for a different set of constraints and benchmarks. The pension plan is behaving rationally assuming liabilities are the benchmark and the objective is to minimise funded status volatility by mitigating interest rate risk. The foundation's bond portfolio is a source of protection, capital preservation, stable income, and inflation/deflation hedging. It would have a larger return-seeking allocation.

4. The financial sector is not fundamentally rotten. Prior to the crash, there was plenty of blame to go around. In the US market for example, consumers lied on stated income loans, brokers missold mortgage products, banks' underwriting standards were relaxed, and government housing policy was flawed. Shifting back to a 20% down payment policy has remedied much of the speculative problem in the US housing market. Our company will continue to emphasise balance sheet strength and measure ourselves by the success of our clients.

Alexander Schindler

Member of the board of Managing Directors

Union Investment

1. Although developed markets are generally offering a smaller growth potential, the European pension market is very attractive. For example, increasing awareness of the necessity of corporate and private pension provision and the possibility of pan-European pension pooling both offer various business opportunities. In addition, an ageing workforce leads to an increased competition for qualified employees where attractive corporate pension schemes represent an important factor. 

2. In contrast to many developed markets, numerous emerging markets are not struggling with public debt. Many companies achieve an earnings growth of 25-30% per year and are issuing bonds to finance expansion. Emerging market equities and bonds should definitely be part of a well-diversified institutional portfolio, representing a double-digit percentage of the overall portfolio, if possible. With a young and growing population, emerging markets offer the opportunity for a ‘demographic hedge'.

3. Like other institutional investors in Germany, foundations - which are strictly regulated - have so far focused on quality bonds, particularly government bonds. But low yields and new risks related to increasing national debt levels require optimised risk-return profiles. This can be achieved through better portfolio diversification. Within the asset class, corporate bonds, convertibles and emerging market bonds could be added to the portfolio. Beyond, equities of European blue chips with global reach and high dividend yields may be used for further diversification. 

4. Increasing regulation represents a challenge. Investment funds are already the most transparent and regulated investment vehicle. Nevertheless, regulation efforts have continually augmented since the crisis - in our view often in an excessive and uncoordinated way, looking at the activities in Berlin, Basel and Brussels. Of course, regulation is necessary, but has to be aligned with the interest of the investors. More than ever, asset managers need a well-established and well-engineered risk management culture.

Jeff Molitor

CIO Europe


1. The pension plans of Europe are large and well-established. Even though these pools may not grow, there will be a substantial amount of assets to manage. Asia and Latin America require different sets of expertise and skill. They are more contributory focused, with different regulations and higher government involvement. There will certainly be opportunities for enterprising asset managers to serve pension mandates in those regions, but they will not turn their backs on Europe to do so.

2. We generally recommend global market-cap weightings. Investors often overweight emerging markets believing their financial markets will outperform due to higher economic growth. Emerging economies may well deliver such growth, but it may not lead to higher equity returns because the expected growth is already priced in. The average correlation between long-run growth and equity returns has been effectively zero, across the major equity markets over the past 100 years.

3. Foundations and pensions funds use bonds for completely different purposes. Pension funds generally have a clearer picture of obligations and liabilities and tend to use bonds to minimise volatility between their assets and their liabilities. Bonds allow pension funds to keep them aligned. Foundations use bonds for diversification, not asset-liability matching, so they should base their bond weightings on expected diversification benefits.

4. Economics and human nature drive financial markets. It's easy to decry the excesses and condemn the whole sector, but that's of little value. Firms offered products that weren't in their clients' best interests. Investors were willing to purchase these products based on past performance, without properly assessing their risk. This behaviour has occurred for decades and is unlikely to change. Providing transparency regarding expected returns and risk, then delivering on those expectations, is the best way to re-earn investors' trust.


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  • QN-2503

    Asset class: Equities.
    Asset region: Emerging Markets.
    Size: EUR 30m.
    Closing date: 2019-01-31.

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    Asset class: Real Estate Core/Core-Plus Multi-sector strategy.
    Asset region: Asia-Pacific.
    Size: $ 50m.
    Closing date: 2019-01-28.

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    Asset region: Global.
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    Closing date: 2019-02-11.

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