Each year, we carry out global surveys on emerging investment issues, involving key decision makers in various pension jurisdictions. In addition to the resulting survey reports, we also publish regular thought leadership articles in the Financial Times and IPE that touch upon the burning issues of the day.

Together, they provide a timely pulse check on the latest thinking on issues of interest to decision makers in asset owners, asset managers and asset distributors.

Having had the privilege of doing over nearly 40 global surveys and over 100 thought leadership articles over the past 20 years, the updates found below provide the basis for discussion and debate.

Quantitative easing: a Faustian bargain
Mon, 13 May 2019

In June 2017, former Federal Reserve Chair Janet Yellen mused that quantitative tightening in terms of balance sheet normalisation would be like “watching paint dry”.

Yet, while the paint was drying, the Fed was at panic stations in January this year, after the stock markets’ cardiac arrest in 2018Q4 was blamed on its rising rates and shrinking balance sheet.

The Fed duly blinked and slammed on the brakes – barely less than a month after Chairman Jerome Powell had triumphantly announced that quantitative tightening “was on auto-pilot”.

To compound the confusion, the President of the Federal Reserve Bank of San Francisco has since confirmed that policy makers see interest rates as a primary tool and the balance sheet as a secondary tool of monetary policy. Translation: Quantitative easing will no longer be purely an emergency measure but is now part of the Fed’s toolkit.

The old joke that anyone who is not confused doesn’t really understand the situation applies to central banks today. After averting a 1929-style global depression in the wake of the Lehman collapse, central banks have faced a Herculean task to unwind their emergency measures. It’s been a journey into the unknown.

“The Fed’s rate cycle increase is over and its next move will be a cut”, the Wall Street Journal stated on May 9th. It expected the Fed fund rate to stay within its 2.25-2.5% range till the end of 2021.

The question is what will happen when we enter the next recession when rates will still be very low. This would mean more quantitative easing. Interest rates could conceivably be pushed into negative territory in ever more countries. For now, quantitative tightening has been dogged by two worries.

First, financial markets have become addicted to QE. What was seen crisis-era medicine has turned into a drug. They are not alone. Even the real economy can’t seem to kick the habit. In the US, it now takes 4–5 dollars of monetary stimulus for every one dollar increase in GDP, compared with 1–2 dollars thirty years ago.

Second, the near-zero rates have stimulated another debt binge: companies have raised billions in bonds, mortgages have been taken out, and governments are nursing vast budget deficits. With rising rates, it would be near-impossible to service the debt without creating a wave of bankruptcies. Defaults on consumer debts have already been rising in all metropolitan areas of the US.

QE now sounds like a Faustian bargain: once you’ve made your deal with the devil, there is no way out. More immediately, it begs two questions.

First, is the old-style investment cycle redundant – maybe not forever, but at least for the next few years?

Second, since interest rates are an unrewarded risk, should pension investors hedge them before they head south again and balloon the plan liabilities?

I would be very grateful to hear your views. I have described the dilemma that pension investors face in my monthly piece in today’s FTfm (13th May 2019). If you are a digital subscriber, the link is here.

Long-term investing shows the early signs of a revival
Mon, 15 Apr 2019

Before the dawn of populism, as excess liquidity bloated asset prices without stoking inflation, pension plans’ interest in long-term investing had waned somewhat. The length of the holding period used in defining long-term investing had been falling.

However, as populism gained momentum on both sides of the Atlantic since the Brexit vote in 2016, the trend has started to reverse. In one of our recent surveys, 44% of our respondents reported that the role of long-term investing will ‘rise’, 48% expect it to remain ‘unchanged’ and only 8% expect it to ‘fall’*.

Long-term investing has come to the fore as geopolitical events and their impacts have proved hard to forecast. Timing the market is a fool’s errand. Few pension plans have the skills and nimbleness to engage in it. In today’s environment, investing is also about sifting the relevant investment signal from the general market noise.

Old style volatility is set to come back, widening the dispersion of returns and reducing correlations within and between asset classes. Furthermore, evidence shows that the dispersion of returns is positively correlated with the time period: the longer the period, the greater the dispersion, and the greater the opportunities for differentiated performance based on a disciplined process.

The old wisdom that true value always triumphs in the end is gaining renewed currency. That means investing in quality assets, so as to gain more by losing less and outperforming over a full market cycle, while allowing more time for risk premia to emerge.

If you are a subscriber to the Financial Times, I have developed this argument in more detail in my article in today’s FTfm (15th April 2019).

*Back to long-term investing in the age of geopolitical risk available from:

The fund industry rediscovers Socrates
Tue, 19 Mar 2019

The fund industry has historically had a hire-and-fire image as a place with no training culture. But that is changing, as it embraces a diversity and inclusion agenda.

Fund managers have increasingly realised that a multicultural workforce translates into a richer variety of approaches to work-related challenges. Such approaches, in turn, are conducive to the kind of innovation that raises business performance.

They also require a richness of thinking, working and learning styles; not clones of the managers who have appointed them. After all, if two people are similar, what have they got to offer each other?

Fund managers have also realised that the old style ‘chalk and talk’ training is no longer enough. One of the key learning avenues now being increasingly adopted is mentoring.

Mentors focus on the individual learner as they develop through their career or life. They act as friends willing to play the part of adversary in challenging situations. They listen and question to encourage the learner to widen their own view. They prefer the ownership and direction of the relationship to lie with the learner. They accept ambiguity as a part of life, providing the learner with openings for change and autonomy.

Mentoring, thus, is about unlocking a person’s potential to maximise their own performance. It is about helping them to learn rather than teaching them. The earliest exponent of these self-learning devices was Socrates. But, over time, his philosophy was overtaken by the old behaviourist view that human beings are little more than empty vessels into which everything has to be poured. But over the past two decades, the Socratic approach has made a big comeback.

It is instructive to examine the origins of the word ‘mentoring’. It comes from Greek mythology, in which Odysseus, when setting out for Troy, entrusted his house and the education of his young son Telemachus to his friend, Mentor: “tell him all you know.” He thus unwittingly set limits to mentoring. But experience shows that it need not be so. Mentoring could be a powerful learning tool. It could deepen the talent pool of the fund industry – and reduce job hopping.

I have described all this more fully in my 18th March 2019 article in FTfm. If you are a subscriber you can access it here.

Overcoming the teething problems of ESG
Mon, 18 Feb 2019

Every once in a while, when a new phenomenon surfaces in the investment landscape, the rhetoric ignores the inherent challenges. ESG is no exception.

Our annual surveys single it out as a foundational trend, for sure. Every investor group has embraced it – wholeheartedly in Europe but less so in America and Asia. It is gaining momentum everywhere. But it is not plain sailing, as many investors are discovering.

To start with there is no widely accepted understanding of what the individual components of ESG mean. There is a tendency among companies to rely on user-friendly definitions when it comes to setting up their ESG stalls. Second, there is also a tendency to exaggerate their ESG footprints, as there is no mandatory requirement to compile the necessary data. ‘Greenwashing’ is not uncommon.

For their part, regulators are creating templates that would minimise it. The recommendations of the Financial Stability Task Force are being studied by national regulators. They enjoin companies and their investors to provide climate-related information in their annual filings, along with actions taken to mitigate climate-related risks.

Article 173 – a provision in France’s energy transition law – has gone a step further by requiring mandatory carbon reporting for companies as well as pension investors. Other countries are expected to follow suit.

However, identifying and modelling ESG risks is even more challenging. The task entails making numerous assumptions at each stage: the creation of climate change scenarios, and the identification of risks, their likelihoods and their impacts on asset allocation. Assumptions are stacked up like a wedding cake.

The good news, however, is that an enormous effort is now being made in creating a workable template for measurement and reporting purposes. More importantly, pension investors are also developing modelling expertise that is essential in identifying risks and opportunities. A new infrastructure of data and expertise is now emerging. Investing will never be the same again.

I have expanded on this theme in my article in today’s FTfm (18th February 2019). If you are a subscriber you can access it here.

Big data set to boost prospects for female star managers
Mon, 21 Jan 2019

The changing world of investing is now putting a growing premium on female intuition. Traditional star culture – mostly centred on male portfolio managers – has been withering on the vine in this decade, as they have struggled to deliver their target returns after fees. The culture has also exposed fund managers to key person risk: the loss of assets when a prominent manager departs abruptly.

Most fund managers are now playing down the cult of personality and adopting a team approach that draws upon a broad range of life experiences and different perspectives. The new approach is reinforced by the rise of Big Data and machine learning.

Separating noise from signal remains a huge challenge as fund managers have sought to extract investible information and actionable insights from today’s rising mountain of unstructured data from various sources. The problem is magnified when portfolio managers use machine learning, which remains a dark box: even the rock stars of data science don’t know why their advanced algorithms do what they do.

Hence, a new form of collaboration is emerging. In it, women portfolio managers are believed by various research studies to bring a key attribute: the ability to intuit a problem when even a spreadsheet suggests otherwise; in other words, seeing what others are seeing, but thinking what others are not.

Male portfolio managers are intuitive, too. But employers now believe that women portfolio managers tend to be stronger on subtle nuances and deeper meanings. On this point, evidence from various studies is mixed. But they are agreed on one point: teams comprising male and female portfolio managers tend to deliver better investment results.

A mixed gender team translates into a richer variety of approaches to investment-related challenges and is conducive to innovation that improves returns. The implied cognitive diversity is not about equality, per se, but may lead to equality based on merit, as a side effect.

Of course, as in sports, teams don’t always succeed. But they do provide a fertile ground for female portfolio managers to exercise their talent. And this is already happening. For example, female hedge fund managers have outperformed over extended periods; as have female mutual fund managers in India.

Data on such outperformance carry the usual health warnings. But they do show that the conventional glass ceiling has been shattered. And the idea of a female star manager is no longer a pipe dream.

I have outlined these ideas in more detail in my article in today’s FTfm today (21st January 2019), if you are a subscriber.

Failure is optional in mergers & acquisitions
Sun, 02 Dec 2018

2017 was a banner year for M&A in global asset management. The tempo has eased somewhat this year. But there is a big difference between the latest wave of M&A and the wave that happened around the turn of the millennium. In many cases, skills as well as scale or market position were the primary driver. In a separate track, team lift-outs have been common.

In contrast, some of the biggest deals in the past were driven by empire building. The outcome was the ‘winner’s curse’: value destruction for the shareholders of the acquiring firm. Many combined firms were inherently unscalable due to cultural mismatches and organisational complexity – and they remain so today.

In hindsight, crunching businesses together proved to be mission impossible. After acquisition, the whole had to be worth more than the sum of its parts.

This has been the exception rather than the rule in the numerous deals I have studied over the past 20 years. Size invariably jacked up costs when firms became too complex to manage efficiently. Many were forced to unscramble or de-merge.

There were no shortage of economies of scale; there was a shortage of management will and the ability to extract it in what is a people business. Deals that slaughtered sacred cows were rare, as were deals that were able to retain the best talent of the combined entity cost effectively. Built around key individuals, the operating models were often exposed to the upward repricing of skills.

In contrast, successful deals had five common threads. First, their senior executives had crafted a sound business case for acquisition that was closely scrutinised by the movers and shakers involved in the integration process. Second, senior executives walked the talk in order to get the necessary buy-in from key staff in every area of the business. Third, jobs were allocated within days of the mergers. Fourth, core decisions on product synergies and cost savings were announced at the outset, with clear timelines and individual accountabilities. Finally, operating models had a strong client focus and meritocratic incentives.

These lessons have shaped the thinking of the new generation of top executives. Their approach to M&A is far more hard-nosed than their predecessors’, who were readily swayed by the big-can-be beautiful argument. But that is not the same as saying that the current wave of M&A can transform the asset industry. It is focused far more on profitability and the survival of asset managers in the face of the relentless rise of passive investing, and far less on radical changes in the existing business models.

If you subscribe to the FT, please see my article of 30th November 2018 for more details.

Elon Musk: a champion of long-term investing?
Mon, 29 Oct 2018

When an iconic entrepreneur is humbled so publicly, it’s a moment of truth. But it’s the bigger truth that is often the real casualty.

Thus it was so over Elon Musk’s dust-up with the Securities and Exchange Commission regarding his fateful tweet on 7 August, which falsely claimed that the necessary funding was in place for taking Tesla private.

Apparently it was a ploy to punish short sellers who had made a bundle from the endless production delays of the car of the future, the Model 3.

But the resulting publicity missed Mr Musk’s main point: namely, today’s markets are over-financialised, as speculative trading comes at the expense of prudent investing.

Equity markets’ primary role is to channel capital from investors to enterprises that want to grow their businesses. Investors are thus issued shares that are meant to claim against the future profits of borrowers.

Over time, however, trading in such claims itself has become more profitable than the rewards for holding them, giving rise to a vast array of financial activity driven by the 24-hour news cycle, which rarely isolates the wheat from the chaff.

Under this unreal quarterly capitalism, where the latest data are all that matters, entrepreneurs are increasingly forced to seek alternative sources of funding for the growth that is beneficial to them but damaging to the integrity of equity markets.

Many long-term investors, like pension plans managing retirement savings,decoupled from the rest of the economy. The result is shorter investment time horizons, an increased search for ‘hot’ products and stronger herd mentality.

Such investors are putting their money where their mouth is by steadily drifting towards private markets with longer time horizons. Worldwide, their allocation has risen from 4% in 1997 to 15% in 2007, and to 25% in 2017. Market distortion is not the only factor, but it is an important one.

Mr. Musk, for all his showmanship, has touched a nerve.

If you are a subscriber to the Financial Times, you’ll find an expanded version in the FTfm today (29th October 2018).

Flash in the pan or game changer?
Mon, 17 Sep 2018

Fidelity’s recent launch of four zero-fee indexed funds has attracted a mixed reaction.

Some see it as a minor ratcheting up in the price war between the mega indexers. Like climate change, they argue, fee models change in tiny steps.

Others see it as a tipping point.  Not only are passive funds now a strong money magnet, they are also enabling index providers to enjoy the so-called network effect. Zero fees, it is argued, will create new revenue streams by cross-selling across the expanding client base, at the expense of specialist active managers.

That fees are a slow-burn issue in global asset management because of its large pool of legacy assets is undeniable. That the price war in the passive space has been causing fee compression in the active space is equally undeniable. The truth, as ever, is somewhere in between – for now.

The media have so far focused on private equity and hedge funds. The change, however, is just as evident across the active space.  Only those managers delivering their benchmark returns have remained immune in this decade.

For the rest, fee pressures have intensified like never before.  And all the more so, since QE has brought forward future returns and turned fees into a key source of outperformance.

Managers are increasingly enjoined to eat their own cooking under the emerging fee models, as fees have become the North Star of the industry.

If you’re a subscriber to the Financial Times, you may be interested in fuller details in an article I wrote for FTfm today, 17th September 2018.

Investment crystal balls: broken or imperfect?
Mon, 13 Aug 2018

“The truth is rarely pure and never simple.”     Oscar Wilde.

Investors have long relied on two crystal balls when predicting future returns: equity risk premium and the yield curve. Both have been broken in this decade because of QE.

Whether the unwinding of QE, however, will mean a return to normality is another matter for one simple reason: these crystal balls have always come with a health warning.

Let’s start with ERP. It measures the additional rate of return that investors require to compensate them for the risk of holding stocks instead of a ‘risk-free’ asset, typically the US 10-year Treasury bond.

In theory, it can never be negative: if it is, investors can always switch out of equities into bonds. Yet, over the past 130 years of data, it has been negative 25% of the time.

Its predictive worth has been undermined by the changing structure of markets. In 1958, the average lifespan of a company listed in the S&P 500 was 61 years. Now it is just 18 years, according to Prof. Richard Foster of Yale University.

The rise of high frequency trading and share buy-backs have also weakened the traditional role of markets as efficient allocators of capital.

The predictive worth of the yield curve, too, has been distorted by central banks’ super easy money policies. But that’s not the only factor. Ageing demographics and ballooning global debt are also bearing down on long-term rates.

The data used to back test the yield curve are, of necessity, drawn from a period when these new structural forces were absent.

QE has therefore supercharged the imperfections of ERP and the yield curve – but not necessarily caused them. Every generation of investors conceitedly thinks that it lives in a transformational era where the tried and tested ways of doing things just don’t work.

But investment history shows that there is no ‘old’ normal or ‘new’ normal. There is only a ‘different’ normal with each cycle.

As investors seek certainty in an uncertain world, crystal balls have their place, so long as they are combined with an uncommon degree of common sense.

I have developed this argument in more detail in my article in today’s FTfm (13th August 2018). If you are an FT subscriber, the article is here.

As always, I welcome your comments.

Investor vigilance rises as populism returns from beyond the grave
Mon, 02 Jul 2018

The Brexit vote, the election of Donald Trump and the gains made by antiestablishment political parties in the West mark the rise of a long-forgotten phenomenon: populism. It promoted fascism when it last reared its ugly head in the 1930s.

It marks an inflection point for the globalisation that has lifted hundreds of millions of people out of poverty in the emerging economies. But it has also reduced prices and median wages in developed economies, causing job insecurity, political alienation and social dysfunction.

Voters are angry. Politics has now become an arena to celebrate all that is small and mean where placebos are paraded as panaceas via angry sound bites.

The most immediate danger is the new wave of tit-for-tat tariffs unleashed by President Donald Trump this year. Do they amount to a full-on trade war or just a brief skirmish? Only time will tell.

Earlier hopes that wiser counsel will prevail after the resignation of his top economic adviser Gary Cohn were short-lived. The cold hard truth is that President Trump sees only what he wants to see.

This is not just a passing phase. Each twist in this saga is chipping away investors’ confidence.   But few are at panic stations – yet. Most are hawkishly watching events.

If you are interested in how pension investors are adjusting their asset allocation to this new reality, and have a subscription to the Financial Times, please see my article in the FTfm on 2nd July 2018.

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