Monday, August 26, 2013

IIF Meeting in Paris (IV) – Changing landscape for institutional investors

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.


“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.


“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].”


“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.


“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.


“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.”


If you work for a member institution and register with the Institute of International Finance, you can watch or download the speeches here.