On June 25 and 26, 2013, the Institute of International Finance held
its spring membership meeting in Paris. During a fourth roundtable,
the participants discussed the changing landscape for institutional
investors.
Walter B. Kielholz, Chairman, Swiss Re
Walter B. Kielholz introduces the discussion by outlining the
difference between a bank and a non-bank investor: Whereas the bank
generates assets and then finances them, the non-bank investor takes
the opposite approach: He has sources of funding and must invest them
on a fairly long-term horizon.
When talking about non-bank investors, Walter refers namely to life
insurance funds, pension funds, individual investments bundled in
mutual funds, private equity investments, sovereign wealth funds (for
example due to excess resources from natural resources), and hedge
funds (using leverage as part of their investment strategy).
The definition of the long-term horizon is, in Walter’s view, not
clear. In terms of time, it can consist of “everything
from more than 1 week up to 50 years”. As a consequence, he
prefers referring to the structured nature of investments to qualify
investments as long-term.
When it comes to the importance of the media coverage, Walter
pinpoints disproportionate media coverage of hedge funds. Contrary to
the impression one might get when reading the financial press, the
institutional investment industry consists, in decreasing order of
importance, of life insurance and pension funds (50-60 % market
share), mutual funds (25-30 % market share), and others (including
sovereign wealth and hedge funds – remaining market share).
Finally, Swiss Re’s chairman selects two major issues the
institutional investment community faces today, i.e. uncoordinated
regulatory measures and treatment of investors' rights in
restructurings such as Cyprus.
Quote:
“Sometimes it seems, if we read the
newspapers, that 99 % or 95 % of institutional investors are hedge
funds because they make a tremendous amount of noise.”
Dr. Richard Clarida, Executive Vice President and Global
Strategic Advisor, PIMCO
Richard gives institutional investors advice, “how
to make money over the next 3 to 5 years”. At PIMCO, three
investing principles currently apply:
- Traditional rules of investing do not apply any more.
- Both bottom up (micro-economic appreciation of markets) and top down (macro-economic appreciation of markets) views count.
- Always think about the way in which you (as an asset manager) are getting paid.
As regards the economic outlook into the next 3 to 5 years, PIMCO
expects
- the US growing in the 2 % range,
- a positive long-term evolution of the European economy, and
- emerging economies growing at a slower pace.
Quotes:
“Rules of thumb about correlations, mean
reversion, and typical behavior of credit spreads […] are economic
history”
“In order to make money you are going to need
both a bottom up and a top down view.”
“Many credit spreads available in the world
now are compensating for the scarcity value of your balance sheet.”
“Liquidity, we [PIMCO] think, will be king.”
Michael Karpik, Senior Managing Director and Head of EMEA,
State Street Global Advisors
Michael contemplates, on the one hand, the challenges imposed by new
regulation on asset managers. The most critical issue here is the
incremental cost for regulatory changes in the financial services
industry.
On the other hand, he insists on the ongoing lack of liquidity in
today’s financial markets.
Lastly, Michael criticizes the implementation of a financial services
tax, saying that such tax will not make the financial services
industry participate in crisis related costs: “We
don't pay the [financial services] tax. This tax is actually coming
out of the portfolio returns [of our clients].”
Quotes:
“We are in a much more complex world and also
in a much more expensive world in a post-regulatory changed
environment. It's forcing a lot of assets managers to change their
business model.”
“I think fund rationalization [i.e. reducing
the number of funds and get fund managers more focused] is not a bad
thing.”
“The biggest impact for us is the draw-down
in liquidity in the markets. Secondary liquidity has been pretty bad,
especially in the fixed income market.”
“The primary concern is on liquidity.”
Stefan Meister, Chief Executive Officer, Partners Group
Stefan talks about the private equity industry as well as structural
changes in national pension systems and their importance for the
institutional investment community.
On the first topic, he stresses the benefits of private equity, not
only in terms of top line growth but also in terms of job creation.
On the second topic, he outlines the shift of pension systems from
defined benefit to defined contribution systems, namely in anglo
saxon countries. In Stefan’s view, this is problematic because it
leads to a focus on the portability of pensions and their daily
valuation. As a matter of fact, this contradicts the long-term view
on pension return generation. Another phenomenon is the increasing
outsourcing of pension systems by corporates which leads to
corporates feeling less responsible for their employees’ pensions
and, ultimately, contracts the long-term nature of managing pension
investments.
Quotes:
“Private equity, indeed, is really
long-term.”
“[Private equity] really focuses on
developing assets – developing companies – much more than on
buying and selling companies.”
“As corporates increasingly get the
impression that they are no more responsible for the pensions of
their employees, they outsource it.”
Donald M. Raymond, Senior Vice President and Chief Investment
Strategist, Canada Pension Plan Investment Board
After describing the Canadian pension system and the activity of the
Canada Pension Plan Investment Board, Donald talks about increasing
disintermediation in the institutional investment process: For him,
this is a positive evolution because
- it reduces agency risk;
- eliminates wrong incentives caused by the presence of intermediaries (A third party investor needs liquidity to calculate his fees and this contradicts the long-term investment approach.);
- origination capabilities of a third party manager are not necessary for sizeable investment projects.
Quotes:
“Disintermediation and removing a layer of
agency risk gives an opportunity for much better alignment of overall
long-term objectives.”
“You don't need the origination capabilities
of a third party manager in infrastructure [projects]. These
[projects] tend to be very large. […] If you can find them, they
can find you.”
“The process can be very long and time
consuming. There is no standardized process for going through an
infrastructure process. In a few cases, we spend up to a year […]
for going through the due diligence process.”
Resource:
If you work for a member institution and register with the Institute
of International Finance, you can watch or download the speeches
here.