Ailman, Maynard, Ryder: What the World Needs Now is…

(September 25, 2013) — Investors should measure results on what they need and recognize the institutional investor framework works, according to three of the world’s most experienced CIOS experienced CIOs.

Chris Ailman, CIO of the California State Teachers’ Retirement System, Bob Maynard, CIO of the Public Employee Retirement System of Idaho, and Adriaan Ryder, CIO of the QIC, spoke to attendees at the Hermes Investment Conference in London yesterday.

All three are members of the coveted 300 Club, a group of leading investment professionals from across the globe.

“We’ve lost historical perspective,” Ailman said. “We have gotten into the mind-set of measuring quarterly performance, which is taking away our view of the long term.”

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“As an investor, when you are looking at sustainability and governance of companies, you have to look at the long term. These things matter. But when you’re referring just to quarterly earnings, company CEOs will cut corners.”

Maynard said he was “bored, but nervous” about the current state of the financial world, but urged investors not to throw the baby out with the bathwater when trying to mend the system.

“We don’t need a new framework,” he said. “Or at least not until we find something that works as well as the last one. The numbers we used were for long-term investment—and if we look through to the 1900s, that’s long-term enough.”

He said investors were fooled by the calmness of the 1990s, whereas the volatility witnessed over the past 10 years was more normal.

“What was the annualised standard deviation we used—10% to 13%? We got about 11%. And the annualised real return rate—4% to 6%? We got around that too. We expected—or we should have expected this.

“You might be down 20% one year, but it rebalances and it gives you a base to work from.”

Ryder at QIC told investors to look after their own business, before comparing it with that of their peers.

“We need discussion around objectives, rather than peer measurement,” he said. “We need to manage all risks, both in our assets and liabilities.”

Ryder said investors needed to be given the flexibility to manage their portfolios by setting a range within which they could move allocations to certain asset classes.

“This way investors can take advantage of crises; they can be opportunistic and tactical,” he said.

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(September 25, 2013) — Managing investment risk has risen up the agenda for insurance CIOs, with 90% of them saying they have increased their investment in risk management.

Research from BlackRock found around 66% of the 200 insurers quizzed planned to use interest rate options for risk management purposes over the next three years, and 42% planned to use equity options.

Another 35% planned to use swaps and equity futures, while 20% were also looking at foreign exchange futures.

David Lomas, global head of BlackRock’s insurance business, said: “Risk management is clearly an area where insurers are strengthening to handle market volatility and a more diverse set of products.

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“This increased focus on risk is giving them the confidence to grow their businesses organically and innovate with new products.”

There was also a significant number of insurers interested in doing more tactical asset allocation and increasing their exposure to beta.

As part of that decision, 83% of insurers said they wanted to increase their ETF use over the next three years, but 70% admitted they needed to know more about how to use them as part of an investment strategy.

“Most insurers have used ETFs before, but the ways they are using ETFS are changing, and adoption is accelerating,” said Raman Suri, head of iShares insurance.

“Constructing diversified bond portfolios is time-consuming and costly, given low inventory and liquidity levels. This is prompting insurers to seek new solutions.”

Recent regulatory changes—such as allowing designated ETFs which receive favourable financial statement and risk-based capital treatment in the US and product innovation—are also driving the change.

Asset allocation strategies are also going through a period of significant change, due to the low-yield environment—insurers are being encouraged to increase investment in alternative asset classes.

Around half of the insurers questioned said they were likely to ramp up their allocations to real estate equity and debt, infrastructure equity and debt, hedge funds, and private equity in response to fixed income supply constraints and the hunt for yield.

In addition, 75% of EMEA insurers, 60% of North American insurers, and 82% of Asia Pacific insurers agreed that they were likely or very likely to make higher allocations to investments in the emerging markets.

The research, compiled in partnership with the Economist Intelligence Unit, also found insurers are planning to shorten durations and move away from benchmarks in preparation of quantitative easing (QE) ending.

Around 70% of Asia Pacific based insurers, and just over half of US and EMEA based insurers, were planning to shorten duration.

The decision has been driven by the future unwinding of QE and the fact that shorter duration bonds tend to become more popular during periods of market volatility.

The full report can be read here.

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