Don't ignore active management, conference attendees told

Asset owners and money managers at Pensions & Investments' 10th annual Global Pension Symposium in Tokyo said active management has a key role to play in helping pension managers navigate a looming period of low returns and heightened volatility.

“Invest in talent,” advised Gregoire Haenni, Geneva-based chief investment officer of the 11.4 billion Swiss franc ($11.5 billion) public pension fund CPEG, Caisse de prevoyance de l'Etat de Geneve, in a speech kicking off the conference's second and final day on Nov. 16.

Passive strategies have gained market share in recent years, but “there are very talented managers in the industry” and now is the time “to invest in the right manager, with the right strategy, in the right geographical region, rather than being exposed to the broad market,” Mr. Haenni told attendees.

In a Nov. 17 interview, keynote speaker Karen McQuiston, head of institutional advisory and solutions at Newark-based Prudential Financial Inc.'s investment management arm, PGIM, agreed that the current moment “could be a good time for active managers.”

PGIM's research on active management cycles suggests the current market environment — with ample room for spikes in equity market volatility — could be one “in which active management works” to cushion volatility.

That message got decidedly mixed — if only in a symbolic way — as the conference drew to a close, when an executive with Japan's ¥129.7 trillion ($1.2 trillion) Government Pension Investment Fund, Tokyo, told attendees the GPIF had decided to count its fast-growing allocations to smart beta domestic equity strategies as passive, rather than active.

In a subsequent e-mailed reply to questions, Shinichiro Mori, deputy director-general of the GPIF's investment strategy department, said since the April start of the current fiscal year, the fund had changed its definition of active and passive investments to count any strategy that aims to track an index, rather than outperform it, as passive — even if that index deviates from market-cap weighted strategies.

With that decision, the fund's S&P Global Intrinsic Value index-benchmarked allocation to Goldman Sachs Asset Management, which had grown to ¥1.575 trillion from zero over the two years through March 31, and its Research Affiliates Fundamental index-benchmarked allocation to Nomura Asset Management, with ¥1.252 trillion, were shifted to the passive column from active. The move effectively halved GPIF's active domestic equity allocation to 2.1% of its overall portfolio.

Market watchers predict the same pattern could emerge when the GPIF announces a new lineup of overseas equity managers in the coming months.

Still, another keynote speaker at the conference cited reasons to hope that traditional “liquid alpha” managers could be on the cusp of winning the time they need from clients to deliver the market-beating returns those clients demand.

Carol Geremia, Boston-based president of MFS Institutional Advisors Inc., told attendees that an asset owner's willingness to stick with a manager over a full investment cycle could prove the key to a successful outcome for both, in a business where top quartile managers often suffer periods of underperformance for years over an otherwise successful cycle.

An MFS survey of asset owners found many still looking at three years as a make-or-break cutoff for managers, even as most pegged a full market cycle at between seven and 10 years. All too often, she said, that leads to clients firing managers at exactly the wrong time.

On that score, Ms. Geremia said she saw reason to hope that growing allocations to “illiquid alpha” strategies such as private equity and real estate, demanding patient capital from asset owners, would help promote the kind of patience that will give “liquid alpha” strategies offered by traditional active managers the time and space they need to succeed.