Revolution and pension funds typically don't go together. But today's investment landscape calls for a revolution in asset owner long–term fund management process and structure. An environment characterized by low returns, rising longevity risk and deteriorating demographics requires nothing less.
The scope of change on pension fund process and structure could rival the revolutionary impact of David F. Swensen, chief investment officer, Yale University, and the Yale model of asset allocation. Roughly 30 years ago, Mr. Swensen argued that asset owners should take advantage of their long-term nature to diversify into private, illiquid securities such as hedge funds and private equity. Today the average U.S. pension fund is invested 70% public equity and fixed income and 30% in alternatives. To survive and thrive in the years ahead will require long-term fund management to undergo a new revolution.
Today's environment is markedly more challenging than that of the past few decades. The global economic backdrop can be characterized by four factors: insufficient economic demand, excess supply, an absence of inflation and an overabundance of debt. Furthermore, recent economic analysis suggests many economies already are growing close to or at full potential while the natural rate of interest has plummeted, a combination that is likely to negatively impact future returns.