EUROPE - Historical data is no longer suitable when developing strategic asset allocation, and institutional investors will have to change their bond benchmarks, according to industry experts at a recent Mercer symposium in Zurich.
In his opening statement, the new head of Mercer Investment Consulting in Switzerland, Christian Bodmer, pointed out that "everything is more volatile" and that instruments with stable returns "can also crash if problems arise".
Carola Benteler, ALM specialist at Mercer Germany, added that the traditional instruments were "no longer efficiently serving their purpose".
"The calculated normal distribution is no longer in line with reality, and once-in-a-century events in quick succession have unduly burdened investors' belief in models," she said.
Benteler said new assumptions and calculations were therefore necessary to focus more on the future.
She said there was a "large deviation" of equity returns from historical averages even over a longer period of 10 years ranging from 9.4% to -0.8% depending on the time period.
She concluded that historical data "was not suitable to determine a strategic asset allocation" and that more forward-orientated assumptions were needed.
She added that, for alternative investments, "no meaningful historical data" was even available.
Further, institutional investors should determine strict risk thresholds and meet regularly to discuss their portfolios, rather than hold emergency meetings when the fund has exhausted its risk budget.
Dominique Grandchamp, senior consultant at Mercer, said institutional investors also needed to adapt their bond indices to avoid having the largest debtors in the portfolio, echoing a similar suggestion made by Swisscanto last week.
Grandchamp said investors needed to broaden their portfolios from large-cap companies in developed markets to small caps and emerging markets, adding defensive strategies to counterbalance the higher risk.
Willi Thurnherr, head of Mercer Benefit Consulting in Switzerland, stress-tested the Swiss pension fund of PricewaterhouseCoopers, which offers flexible pensions with a bonus system.
The system proved to be more resistant in a crisis than inflexible funds, but the liabilities still spiked when returns slumped considerably.
Thurnherr pointed out that only a much lower guaranteed pension level could solve this problem.