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ASSET OWNERS

Institutions sticking with long-term outlook, GFOR panelists say

Hisae Sato
Hisae Sato, CIO-finance department, Nissan Motor Co. Ltd.

Institutional investors are sticking to their long-term investment tenets, in spite of the current low-return environment that might lure some to resort to short-termism in order to hit target return rates.

Maintaining a long-term focus “can be difficult,” said Hisae Sato, chief investment officer-finance department, Nissan Motor Co. Ltd., Tokyo, during a panel discussion at Pensions & Investments' Global Future of Retirement conference in Washington on Tuesday.

Ms. Sato oversees investment of ¥1.2 trillion ($11.2 billion) for Nissan's pension plans worldwide with the goal of hitting a 4% real rate of return, which she said is much harder of late, given negative interest rates in Japan and corporate issues.

“It's important not to be too conservative or too aggressive” while investing under difficult conditions, said Ms. Sato.

Investment staff who manage the $22 billion benefit plans of The World Bank Group, New York, are able to maintain their long-term focus thanks in part to the support of the “well-defined, robust governance structure” of the oversight committee, said John F. Gandolfo, director and CIO–pensions and endowments, department of treasury.

The bank's investment policy requires Mr. Gandolfo and the oversight board to take a long-term view — between 15 and 20 years — regarding the plans' ability to meet the 3.5% real rate of return goal. That works well because the diversified asset allocation for the plans “requires a long-term investment period,” Mr. Gandolfo said.

Finally, “significant outreach to constituents” that explains the impact of short-term returns in the long-term investment context also shores up support for focusing on the long term, Mr. Gandolfo said.

Institutional investors' long-term horizons can improve the performance of some of the companies in which they invest, said Conor Kehoe, a London-based senior partner and director of McKinsey & Co.

“Short-termism impacts returns,” Mr. Kehoe said, noting corporations under pressure from investors with shorter time horizons tend to lose their own long-term focus.

That said, a “longer-term investment view can be detrimental to plan participants if you stick with companies that may be hurt by market conditions,” said Peter Newell, managing director and senior portfolio manager at Vontobel Asset Management Inc., New York.

In response to a question from the audience about how best to maintain a long-term investment view if a mature pension plan is cash-flow negative because of benefit payments, Mr. Gandolfo said that “impairment may not be a huge problem if the pension plan can achieve its assumed rate (of return).”

He added that it's likely pension funds will underperform in coming years and their boards likely will accept underperformance for one year. “But if it continues for two or three years, it will test the long-termism of boards.”