White Papers

The Why Question

Saker Nusseibeh, Chief Executive Officer, Hermes Investment Management

Economics has developed as a science, conveniently forgetting its roots in political philosophy. Unfortunately that ‘science’ is severely dated, and the functioning of the global capital markets has become separated from the real world. A simple thought experiment throws light on the theoretically correct strategies for a rational saver, but leaves us with unsatisfactory answers. Neglecting the societal context of our saving activity only serves to further isolate the capital markets. Instead, a self-perpetuating system requires investors to evolve from simple allocators of capital to its steward, with far broader responsibilities. Maximising holistic returns represents practical action of the responsibility by investors, and stretches far beyond creating wealth simply for its own sake.

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Using wealth, not returns, to set e objectives and measure success

Stefan Dunatov, Chief Investment Officer, Coal Pension Trustees Investment Limited

For asset owners that have liabilities to meet, whether they be pension or endowment funds, or a saver planning for retirement, one of the key questions they must answer is how much wealth they need to generate in order to at least meet those cash-flow requirements.

Traditionally, investment objectives and our success in achieving those objectives has been predominantly measured by looking at total returns – the general level of return averaged across the life of the fund in question. For example, a pension fund would need to achieve X% return over its expected life to have sufficient assets to meet its expected liabilities. For an individual saver, what level of assets is enough to ensure they have sufficient funds to live on once they retire?

It is becoming increasingly clear, however, that focussing on total returns is not sufficient. These questions may be better answered by looking in greater depth at the level of absolute wealth as a target consistent with a desired objective, and the impact of different paths of return on the likely level of that wealth during the accumulation and spending phases of a fund.

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The 300 Club: A fundamental behavioural shift is needed to close the gap between the rhetoric and reality of governance improvements for European pensions

Sally Bridgeland, FIA and Prof. Amin Rajan, CEO of CREATE–Research

Despite the significant changes made to European pension business models since the financial crisis, a more fundamental behavioural shift is needed to address the yawning gap that exists between the rhetoric of governance improvements in recent years and their reality on the ground, according to Sally Bridgeland and Professor Amin Rajan in their paper entitled Governance practices: Bridging the gap between rhetoric and reality.

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The hidden trade-off in DC pensions

Zuhair Mohammed, Partner, Global Investment Practice, Aon Hewitt

DC investors are making a costly trade-off that many are completely unaware of. The focus on daily liquidity in DC pension products might provide member with the ultimate flexibility governments want them to have, but the vast majority of member neither use that flexibility nor realise the hidden cost at which it comes. Research points to a potential gain of five percent or more if DC pension pots were allowed to invest in illiquid assets.

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The third way: A hybrid model for pensions

David Villa, Chief Investment Officer and Chairman of the Investment Committee, State of Winconsin Investment Board

Conventional wisdom focuses on two structures for accumulating wealth to provide income for retirement: defined benefit and defined contribution pension schemes. In each case, ownership of both upside and downside risk sits firmly on one side of the table. There is little talk of alternative structures.

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Torn up tracks

Saker Nusseibeh, Chief Executive Officer, Hermes Investment Management

A few years ago, when the 300 Club was first established, the financial community still held
onto a belief that the economic and financial tools traditionally used for decision making
would be more than adequate to navigate the global economy’s return to safe harbour and
rebuild the financial system.

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The culture of sustainable investment performance

Roger Urwin, Global Head of Investment Content at Towers Watson

Peter Drucker famously said: “Culture eats strategy for breakfast.”

In the investment world, while investment strategy delivers performance it is the people and the culture that shape the investment strategy. It follows that culture is integral to the quality of investment performance and sustainability of investment organisations. Yet this little-understood ‘secret sauce’ of investment organisations is all too often under emphasised to the detriment of the organisation itself and those who trust it to manage their money.

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The role of Core Asset Managers in the Global Economy

Yves Choueifaty, President TOBAM

The asset management industry exerts unprecedented influence on the global economy. With global investable assets expected to increase to more than $100trn by 20201 (six times total US GDP in 2013), and the need to find scapegoats in the wake of the 2008 financial crisis, it is important to consider the role and responsibilities of core asset managers in the global economy.

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Lessons from the last 40 years for the next 20

Alan Brown, former Chief Investment Officer, Schroders

Einstein reputedly said: “We should always make things as simple as we can, but no simpler.” Looking back over the last 40 years, it is clear the investment community has repeatedly been guilty of oversimplification to the detriment of investors. The lessons of the past convince me that, going forward, successful asset owners and asset managers will be those that stop making things too simple.

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Managing risk in a complex world

Bob Maynard, Chief Investment Officer at the The Public Retirement System of Idaho (PERSI)

The best risk control lies in being able to see an entire portfolio easily and being able to spot deviations from the expected without difficulty. Transparency should therefore be the primary method of risk control in most portfolios.

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Defining true risk

Stefan Dunatov, Chief Investment Officer, Coal Pension Trustees Investment Limited

The investment industry has two great failings: the inability to identify the right risks when considering investment objectives, and then measuring those risks the wrong way. This short paper explores why the investment industry has become so focused on using volatility as a measure of risk, and the potentially dangerous implications that has for long-term investors in achieving their objectives. A long-term investor’s appetite or tolerance for risk should be a direct function of their individual objectives and should not be measured by a short-term metric like volatility. Forecasting returns, not risk, should sit at the heart of long-term investors’ asset allocation strategy.

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Dynamic Asset Allocation and Fund Governance

Alan Brown, former Chief Investment Officer, Schroders

It is increasingly widely recognised that the industry’s best practice model of the last three decades has not served us well and is arguably not fit for purpose. But while it has been easy to pick holes in the current model, many, if not most funds, carry on regardless because no new model has emerged to take its place.

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A paradigm shift in the asset management industry

Lars Dijkstra, Chief Investment Officer, Kempen Capital Management

In the past thirty years asset management has evolved from a profession to a distribution-driven industry, and shifted from a client-driven approach to being product-driven. In the third paper published by the 300 Club, From short-term salesmanship to long-term stewardship: A paradigm shift in the asset management industry, Lars Dijkstra analyses the main developments on the demand side, with a specific focus on the challenges perceived by (Dutch) institutional clients, and the supply side. Moreover, he looks at the position of the asset management industry in 2012.

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The Death of Common Sense: How elegant theories contributed to the 2008 market collapse

Prof. Amin Rajan, CEO, CREATE-Research

In the first paper published by the 300 Club, The Death of Common Sense: How elegant theories contributed to the 2008 market collapse, Professor Amin Rajan examines modern portfolio theory’s influence on the thinking of successive generations of investors and policy makers since the 1960s and the role it played in the financial crash of 2008.

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A Call for Honest Fools

Dylan Grice, Strategist, Société Générale

The 300 Club’s Dylan Grice contends that central banks dictating economic policy do so on the basis of profoundly faulty reasoning and that such presumed knowledge has been pivotal to today’s multiple crises. Regulatory reform of finance will be meaningless without root and branch reform of central banking.

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