APG, PGGM Bolster Sustainable Investing Efforts

Two of Europe’s largest pension funds have expanded their collaboration in sustainable investment ahead of a United Nations (UN) conference in Singapore.

“In the coming 15 years, we will need all hands on deck, and we will need a contribution from major institutional investors to achieve these goals.”In a joint open letter to institutional investors gathering at a UN Principles for Responsible Investment (PRI) conference this week, the CIOs of PGGM and APG said they were “closely collaborating” on investment projects with other Dutch asset managers and Sweden’s four main public pension funds.

“Our clients are explicit about the specific societal goals they want to align with; where they want to invest their beneficiaries’ money—not just where they don’t want to invest,” wrote PGGM’s Eloy Lindeijer and APG’s Eduard van Gelderen, who together oversee more than €600 billion ($675 billion). Dutch pensions are keen to invest in areas such as education and health care, the pair added, “without compromising on the financial result.”

Fund managers MN, Actiam, and Kempen have all “worked intensively” on such themes, alongside Sweden’s AP1, AP2, AP3, and AP4.

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“In the coming 15 years, we will need all hands on deck, and we will need a contribution from major institutional investors to achieve these goals,” Lindeijer and van Gelderen said.

The CIOs highlighted the importance of being able to measure the contribution made by each investment towards sustainable development goals—which could also help attract and retain customers. “This is work in progress, both for companies and investors,” they said. “Simultaneously, it is also a source of innovation and motivation.”

The “PRI in Person” conference in Singapore, which began on September 6, has featured contributions from major asset owners including the California Public Employees’ Retirement System, the New Zealand Superannuation fund, Japan’s Government Pension Investment Fund, and Australian funds HESTA and Cbus.

Representing @CalSTRS at the #PRIinPerson w 2 other staff, one of the FEW CIOs to participate. Making a difference ! pic.twitter.com/woDG6yW2xl
— Christopher Ailman (@CJAtheCIO) September 6, 2016

“Together we can change the world to make to make it a better place to live and retire in,” Lindeijer and van Gelderen concluded.

Last month, investors representing more than $13 trillion called on the G20 to implement high-level goals aimed at mitigating climate change.

Does your asset manager have the mental ability to outperform in their investments?

Researchers from the University of Zurich and Yale School of Management have suggested that success in asset management requires two kinds of intellectual strengths: analytical and ‘mentalizing’.

Analytical ability refers to a “person’s grasp of the quantitative aspects of a decision problem,” including “logical reasoning and mathematical or probabilistic calculations,” explained Andreas Hefti, Steve Heinke, and Frédéric Schneider. ‘Mentalizing’ capability, meanwhile, is rooted in empathy and psychology: It explains the ability to “understand others’ beliefs and intentions, which helps to predict their actions.”

Both, the authors argued, are necessary for high performance in investing.

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“To correctly understand the fundamental value of an asset, a trader needs analytical ability, and to correctly judge market sentiments, she needs ‘mentalizing’ ability,” they wrote.

To prove this theory, the researchers divided managers into classifications depending on their ability in each of the two areas: “technocratic” investors—highly analytical with low ‘mentalizing’ capability; “semiotic” types—“keenly aware of others’ behavioral patterns” but lacking “a conceptual understanding of the decision situation”; and “sophisticated” investors—strong both analytically and behaviorally. The fourth group—“featureless”—was weak in both areas.

These investors then made trades over 15 periods of an asset-market game which eventually resulted in a price bubble.

The technocrats largely traded on fundamentals—buying cheap and selling high. While these investors made money from the dividend, they “miss out on the profits from speculating on the bubble,” the authors noted.

Semiotic investors, meanwhile, followed the rising asset price, with holdings peaking just after prices peaked.

“These types make the largest losses as they are unable to unload their shares profitably after the peak,” the paper said.

Sophisticates, who anticipated both the rising and the bursting of the bubble, made the most money by having the best market timing.

“A purely ‘fundamentalist’ approach to asset trading, without an understanding of the psychology of the market,” the researchers concluded, “may not yield maximum profits.”

Read the full report, “Mental Capabilities, Trading Styles, and Asset Market Bubbles: Theory and Experiment.”