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Eisenhower famously noted that “plans are bulls**t, but planning is everything.” So it is with predictions. In and of themselves, predictions are not worth much, but understanding what your choices are when change convulses the landscape matters greatly. So here are some thoughts for asset owners.
First, it is quite clear that the present investment backdrop is unsustainable. Interest rates this low and debt this titanic cannot cohabit for much longer. The market will outlast the Fed’s constraints: some sort of status quo ante will reassert itself. What that means is uncertain, of course, but no one should be looking at asset allocation now and making anything but short-term decisions. Soon enough, the cat will be out of the bag. If there was ever a time to take investing one day at a time, it is now.
Second, think twice about big bets in the present environment. If we have learned one thing from JP Morgan and The Whale, it is that even the smartest investor with the most resources is vulnerable to risk. (By the by, despite the gnashing of teeth, there is no grand lesson to be drawn from JP Morgan’s mistake other than the fact that it was a mistake: the episode tells us little or nothing about JP Morgan’s systemic fragilities and much about how difficult it is to get the market right. It was ever thus.) Risk is going to assert itself soon enough: As Standish’s Ted Ladd observes elsewhere in these pages, if you find yourself taking excess risk now, go back and change your assumptions to preclude exactly that. Perhaps unsurprisingly, public funds lead the risk charge, facing return assumptions that might just have made sense a decade ago but are preposterous in the current environment.
Third, going forward you’ll have fewer relationships than in the past, so consider them more carefully. In particular, you’ll have fewer asset managers, and you’ll entrust them with more assets. Kick the tires hard: These are relationships that matter greatly. Some of you will indeed devolve to just two relationships, an investment outsourcer and a custody bank. Consequently, the most important decisions you will make come down to these two appointments.
Fourth, for most Americans, the most important retirement decision made on their behalf will be the target date fund that their sponsors choose or construct. Millions of Americans will be defaulted into these funds and will remain with them until they retire. Behavioral finance has designed these defaults and the regulators have blessed them. What that means is that for corporate plan sponsors, the composition and cost of that target date solution warrants all the attention that it can get. It’s an indictment that many sophisticated plan sponsors still offer their participants an off-the-shelf target date mutual fund.
Fifth, next time someone from an insurance company calls, take the call. It is yet unclear whether insurance companies are ready for prime time in the pension space—they have been away from most of the action in institutional asset management for almost a generation. That said, the world is moving their way. Pension risk transfer is only going to grow, and only insurance companies can provide the guarantees that safeguard these strategies. Likewise, a retirement income component is going in time to become de rigueur for every defined contribution plan. It might be that today is not the time to pull the trigger on either of these strategies, but now is certainly the time to learn about the costs and efficacy attached to pension risk transfer and retirement income.
Sixth, invest in a greater understanding of the ETF space. These are extraordinarily efficient investment vehicles and a new breed of asset manager is emerging with strategies that are entirely ETF-based. These strategies are liquid, nimble, and cost-effective. They merit real attention.
Seventh, go back and reconsider items 1 and 2. We live in interesting times, and as a consequence there are no facile pathways to respectable risk-adjusted returns. The winners will be distinguished by intelligence, flexibility, and diligence. The rising tide that lifted all boats seems a quaint reminder of a time—in truth, only a very brief time—when equity markets only knew how to rise.
Charlie Ruffel—founder of aiCIO and Asset International’s other media brands—is a global authority on retirement, asset management, alternative investments, and securities services issues. He is now Managing Partner at Kudu Advisors, which provides M&A and strategic advisory services to institutional asset management and global asset servicing businesses.