Institutional investors need to alter their thinking when it comes to investment management in the lower-for-longer interest rate and returns environment.
Delegates at the Pensions and Lifetime Savings Association's annual investment conference, held in Edinburgh March 8-10, were challenged by academics, politicians, money management and pension fund executives, to check and amend their existing assumptions about the industry if they are to continue to meet the outcomes needed by their plans' participants and clients.
“Often the unexpected happens, but if you can get on top of that and prepare for it, that is better,” said Ed Balls, former shadow Chancellor of the Exchequer and chief economic adviser to the U.K. Treasury, opening the conference. “But of course, you can only do that if you have gone through the process of asking yourself: What are the assumptions which are actually underpinning our decision-making so that we can challenge them.”
While the official theme running through the conference was diversity, a key takeaway was the urgency to challenge assumptions. Mr. Balls said there are a number of reasons things go wrong in politics and government — and that might also resonate with conference delegates.
Some mistakes, he said, will be “right there in front of you, but you just didn't see it … The worst mistakes are the ones you see, but you do it anyway,” citing the abolition of a 10-pence tax category in the U.K. “It was there, and you could see the distribution of consequence,” but it was done anyway.
Then there are the mistakes where the forecast is wrong. “If we had known in 2004 there would be migration from East European countries on the scale that we subsequently saw,” there would have been transitional controls on European Union migration in place, Mr. Balls said. “But we just didn't see it. The forecast was wrong, nobody saw it, inside or outside of government.
“And there's also mistakes which you make despite your very best efforts.”
On the investment side, Saker Nusseibeh, CEO at the £28.5 billion ($35 billion) Hermes Investment Management, used his time speaking on a panel focused on “Facing the Headwinds: Investors and the Economic Outlook” to step back from what's happening today, and challenge the assumptions behind investing for a pension fund over a 30- to 40-year horizon.
“The key is … most of the ways in which, as pension schemes and pension plans, we invest have at the root an acceptance of the way the economics of the world, and particularly the markets and asset classes of the world, work. That is at the basis of what we do. So there is an assumption that there is a natural rate we can get over the long term. There are dips in cycles and there are peaks — but over the long term we can expect to make a return of a certain number,” in the region of 6% to 8% per year.
However, he said, people are considering the current period as a dip in the cycle. “We look at the markets … and we think it's going to get better. What if it isn't? Why should it be? Because the fact is, we are still suffering from the results of the '08 crash – that is the reality.” The economic slowdown and “mountain of debt” have resulted in “incredibly low monetary policy,” leading to asset returns correlating with yields. “Is this last eight years an anomaly, or actually have we had a step change where we are, for the foreseeable future, in a permanently low interest rate environment?” Mr. Nusseibeh asked.
He cited analysis showing returns from any mix of asset classes will not yield more than 2%, at best 3%.