We all agree… but
Everyone agrees about the problems. And everyone agrees that institutional investors need diversified, long-term, risk-managed portfolios to help them meet their liabilities.
At least, that is what I concluded after I attended the latest Worldwide Institutional Investing Conference in London last month.
First off, a famous CIO told us to prepare for an increasingly bumpy ride and that the current cycle of debt and de-leveraging will take time to work through. Greece might (or might not) leave the euro.
While we can't rely on China and the emerging markets to bail us out with their demand now, we need to prepare for a shift in wealth to emerging markets and to prepare for a world with multiple reserve currencies.
Everyone agrees that European government debt (precisely what our regulators are pushing us to buy) is a bad deal and that resource infrastructure is a good match for our liabilities. But it's a shame that most infrastructure funds don't cater to our needs.
When is inflation going to hit? It will probably not be sooner but definitely in the longer term. Or in the medium term. The trick is not to get the timing wrong, though.
At the airport, I meet Bram. Bram works for BIG Asset Management in the Benelux and we talk while we wait for our planes. ‘How did you find the conference?' he asks.
‘I might as well have gone home on the first day, since everyone agreed on the problems and what we need to do,' I tell Bram. ‘The real issue is, of course, that no-one really knows or agrees how to implement the ideal portfolio, or how we should best protect ourselves from the storms we know are coming.'
I tell Bram how 200 or so pension funds from around the world listened and argued for two days about the right strategy on the snakes and ladders game we all play - avoiding the big snakes of downside volatility and climbing the ladders of long-term risk premia.
‘It's a difficult game sometimes,' says Bram. ‘Especially if the regulator keeps changing the rules of the game and loading the dice against you.' ‘Yes,' I reply. ‘And if the consultants you hired to advise you haven't been able to help you avoid the snakes that lead to underfunding, or the solvency trap when you can't take risk to get out of it because the regulator won't let you.'
‘So what's your best idea?' I ask Bram as we both get up to board our flights. He thinks for a while and says. ‘Equities. US equities, in fact, and specifically companies that are leaders in their sector, with a proven business model, a good valuation and usually with a dividend.'
Bram grins as he walks off to his gate. ‘Indexed US equities, long-short, low volatility, you name it, we can offer it,' he says as he waves goodbye.
Pieter Mullen is investment director at Wasserdicht Pension Funds