Managing Objectives, Maximising Opportunity


Key investment themes revealed at CAMRADATA’s annual Pension Conference ‘Managing Objectives, Maximising Opportunity’

30 April 2018 – Speakers at CAMRADATA’s annual investment conference for the pension fund industry held in the City of London on 19th April revealed five asset classes and solutions that could help pension fund managers protect assets and generate returns this year.

These included real estate income, the opportunities in the Asian markets, the growing interest in real assets and late cycle opportunities in fixed income, plus how a better understanding of behavioural finance could lead to a more acute awareness of market trends.

Natasha Silva, Director, Client Relations at CAMRADATA said, “The roles of all those involved in the management and maintenance of pension funds are expanding continuously against a backdrop of changes to the political landscape and regulation and the need for sustainability.

“The challenge of building genuinely diversified portfolios that deliver growth and income efficiently and on an attractive risk-adjusted basis is like finding the Holy Grail. Our speakers from five leading investment companies presented their views and highlighted exciting opportunities in the traditional and alternative space.”

The five key themes of the conference were:

The Changing Role of Real Estate

Ian Mason, Director and Portfolio Manager of the Real Return Fund at AEW opened the conference discussing the changing role of real estate income in cashflow matching strategies.

He suggested that pension funds seeking cash flow matching strategies could do a lot worse than consider real estate income. He said, “Property is a very simple asset class; if you focus on property fundamentals and buy quality buildings in areas where there is strong occupier demand, then if the market rent goes up, the value goes up.”

The AEW UK Real Return Fund was launched two years ago and as at 31st December 2017 was distributing a 5.3% yield from a portfolio of 35 properties, with a weighted average lease length of over 17 years and 77% of income linked to inflation.

Mr Mason adds, “The strategy offers clear alignment between the Fund and the needs of investors, as well as a foot inside both equity and bond camps: a real asset growth strategy with relatively high-levels of sustainable income, as the hunt for yield continues.”

Behavioural Finance

Stacey Nutt, PhD, Principal, Lead Portfolio Manager, CEO and CIO at ClariVest Asset Management LLC discussed behavioural finance and how their distinctive investment approach is best defined as behavioural.

He said most managers evaluate investment opportunities through one of a number of perspectives, often referred to as their style (value, growth, quant etc) and that decision making is tainted with behavioural bias which can prevent objectivity. This can make diversification in a portfolio difficult as investors are pulled towards scenarios they are comfortable with rather than pushing for alternatives.

Investor behaviour provides an alternative approach. This is a focus on identifying optimal entry and exit points within companies’ fundamental cycles as investors are faced with changing fundamentals, yet heuristically anchor expectations to historical or cross-sectional stereotypes or norms. He also highlighted the importance of self-awareness of bias to help prevent the decision-making process being corrupted.

Understanding how investors behave is key to the firm’s approach. Mr Nutt said, “Across capital markets we can count on the fact that everything changes as fundamentals cycle through time. We can also count on investors reacting inefficiently to this change. There are multiple reasons for this, both incentive based and behavioural.”

Mr Nutt added, “We integrate quantitative tools throughout our investment process to nudge our qualitative decision making towards objectivity and away from our own behavioural biases.”

The Rise of the Asian Consumer

Natalia Mu, Client Portfolio Manager at Mirae Asset Global Investments talked about the opportunities in Asia and the rise of the Asian consumer is the most important opportunity in Asia over the next few decades.

Ms Mu highlighted that main factors encouraging the long-term consumption trend in Asia are demographics, wage growth and government policy.  China is the key growth driver in the region and government policy is underway for transforming the economy to a more consumption led economy.

Ms Mu said Asia can be a game changer in a portfolio to maximise opportunities, despite some investors being wary of the volatility in this region. She highlighted that China has quickly become the world’s largest e-commerce market with more than US$750 billion sales in 2016.

Ms Mu said, “The Asian consumer opportunity is wide ranging and the best way to capture and benefit from this theme involves identifying the nascent developments early on. To do this well, it is important to have a presence in the local market.”

When asked about the risks for the upcoming six to twelve months that may occur to the fund and the Asia consumer market, Ms Mu said, “Our overall outlook is fairly positive as fundamentals continue to show signs of further strengthening. Underlying demand in major markets, such as China and India, appear resilient.

“The main risks would be related to a meaningful deterioration in the current global macro environment such as excessive government/central bank tightening and global geopolitical risks. Given this, we expect 2018 will be a more volatile year; however, we believe the impact on company earnings should be limited for the consumption theme.”

Late Cycle Opportunities

Dan Roberts, Executive Managing Director, Head of the Global Fixed Income Group at MacKay Shields and Steve Cianci, Senior Managing Director at MacKay Shields then discussed late cycle opportunities.

They highlighted that the USA was the first to emerge from the financial crisis and, subsequently, has experienced the longest expansion among major industrial countries. As such they say the US economy is showing signs that are usually toward the latter stages of a normal economic cycle.

However, MacKay Shields does not see an imminent downturn and while risks are increasing, so are opportunities. Its approach is to focus on investment themes that reflect both the maturity and outlook for the economic cycle, as well as the opportunities in sectors and security.

Dan Roberts said, “Our process focuses on identifying and avoiding uncompensated risks that exists in the markets and in individual securities. The key risks we see include technological disruption across a range of industries from energy to retail, together with idiosyncratic risks.

“Portfolio construction can mitigate and manage these risks while identifying pockets of value. Diligent security selection and asset allocation can then exploit these pockets of value in the market that has seen spreads tighten in concert across all asset classes and spectrums.”

The Case for Diversified Real Assets

Finally, Vince Childers, Senior Vice President and Portfolio Manager at Cohen & Steers discussed how listed real assets can potentially combat today’s investment challenges. He highlighted that many investors are focusing on alternatives to diversify beyond traditional equities and fixed income.

However, despite the wide range of real asset exposures available, investors have tended to focus on just one or two categories of real assets – most commonly, real estate and infrastructure – but this approach has its drawbacks.

Mr Childers highlighted the case for blending real assets to smooth out volatility of individual real assets. Also, by focusing only on real estate and/or infrastructure, investors stand to miss out on the prospective complementary attributes of natural resources and the broader commodities complex.

Mr Childers said, “By treating real assets as an asset class and establishing a diversified exposure to all four core categories of real assets – global real estate, commodities, natural resource equities and global infrastructure – investors stand to benefit from the full potential this asset class has to offer.”

Cohen & Steers’ analysis of nearly half a century of data shows that an equal-weighted blend of the four core real assets exhibited three valuable characteristics – diversification, inflation sensitivity and return potential.

Mr Childers added, “While each real asset category has unique fundamental merit, historically no one type of real asset has excelled equally across all three criteria of diversification, inflation protection and returns.

“This absence of a “silver bullet” solution suggests that a diversified portfolio of real assets may help investors better navigate the tradeoffs of individual categories and provide an optimal approach to a real assets allocation.”

The annual ‘Pension Conference, Managing Objectives and Maximising Opportunity’ took place on Thursday 19th April 2018 at Pewterers’ Hall, London EC2V 7DE.

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