From ai5000 Magazine: Playing the Right Game

The active versus passive investment debate has raged within academic circles for decades without resolution. Unfortunately for the world’s asset owners, this has left them wondering what game—Chase alpha? Ride beta?—they should be playing.

There’s a possibly apocryphal story that floats around pension fund circles. A manager for one of the largest corporate funds walks into an office suite to give his quarterly presentation to the executive policy committee. Alan Greenspan has recently made his famous “irrational exuberance” comment, and the company brass is discussing the fund’s mix of stocks and bonds. One of the execs is of the opinion that stocks have risen dramatically in the past few years and are due for a correction, and that the pension fund should reduce its equity weight substantially.

“Well, what do you think,” a more skeptical committee member asks the pension fund manager, who has been avoiding the conversation until now.

“This is what you’re doing if you take the equity weight down,” the fund manager replies, and, like a comic prop, produces a pair of dice and tumbles them across the conference table, where they come to rest in front of the exec who wants to cut back on stocks. The bearish exec frowns, there’s a moment of nervousness, and then the skeptic bursts out laughing, relieving the tension. The company decides not to cut its equity weight.

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(July 26, 2010) — A survey of asset managers shows a recognition for the need for active engagement yet also a worry that hopes may be too high for their prospects.

The study of 75 asset managers managing about 3 trillion pounds in Britain, conducted by the Investment Management Association (IMA), showed that asset managers may have an unrealistic set of expectations as to how they can control Britain’s largest companies through engagement with their directors.

The survey, conducted between February and April 2010, found that funds are increasingly moving away from equities, therefore controlling a smaller proportion of UK companies and surrendering influence, making it more difficult for fund managers to hold boards to account. Meanwhile, pension funds have heightened their focus on liabilities. Liability-driven investment (LDI) strategies grew by more than a third in 2009 to some 175 billion pounds, representing 18% of corporate pension fund assets.

Respondents to the survey also reflected the belief among UK asset managers that uncertainty over tax and immigration policy could drive some fund companies to target future expansion outside the UK, highlighting the need for a more stable operating environment in the region. Nevertheless, asset managers identified a variety of attractions for the UK as a business hub: ‘natural advantages’ of time-zone and language to its ability to attract talent internationally. The importance of being part of a wider financial cluster – especially the proximity to the sell-side – was also viewed as an important factor for many firms, the study indicated.

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“Asset managers still rate the UK’s investment infrastructure and reputation as a premier league financial services centre,” Richard Saunders, chief executive of the IMA, said in a statement. “They are not about to up sticks, but there is certainly more restiveness about the UK this year than last, with particular unease around the impact of tax and immigration policy. In our view, this presents the Coalition Government with a strong opportunity to provide certainty to an industry managing assets equivalent to 240% of UK GDP.”

Furthermore, the report showed the use of passive management is most pervasive within the pension fund landscape. In the corporate pension fund environment, passive mandates represent around 35% of total assets managed in the UK.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742