UK - Asset managers are inefficiently allocating capital on behalf of pension funds because of a disproportionate focus on short-term performance relative to the investment horizon of the fund, according to the Marathon Club.
Sir Graeme Davies, chairman of the Marathon Club and the Universities Superannuation Scheme (USS), said by holding beauty parades and appointing investment managers on three year mandates, pension funds were encouraging them to adopt strategies that were not consistent with the fund’s long term goals.
Speaking at the NAPF’s annual investment conference in Edinburgh, he told delegates pension funds should expect periods of poor performance from managers, as performance “comes in waves”.
Through research and industry consultation, the Marathon Club is aiming to assist trustees in formulating and implementing investment strategies that are in line with long term investment goals.
Yusuf Samad, associate at Hewitt Associates, told Global Pensions: “Performance or returns may be an indicator but you want to dig deeper into the portfolio of companies you invest in. If you value a company based on short cut measures such as price to earnings compared to other companies, you’ve done nothing to look inside the business itself. Pension funds are long term investors, their investments are going to bear fruit not today but 10 years from now.”
Giustino Palazzetti, also an associate at Hewitt, added: “In typical mandates at the moment, stocks are held because of their size within the index, not because of strength of conviction that they’re actually sensible investments.”
Samad added: “That’s where the risk is of misallocation is… short term you could say ‘this return has been excellent but three years down the line you’re going to have a problem’.”
“Derivatives don’t use up capital so by using swaps you can actually use your capital to invest for return purposes. I don’t think there is any incompatibility in long term investment in equities and liability driven investment, it’s a compatible package that pension funds can have.”
By Kristen Paech
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