(April 13, 2012) — Investors and their advisers discussed the themes of the day at New York City’s Harvard Club yesterday, covering topics spanning outsourcing investment decisions to fees paid on custody accounts.
The day began discussing the notion of risk parity – a topic that has divided the investment intellegentsia – and how it could be used in a changing financial environment.
Panellists argued diversification of leveraged positions was imperative, but it was debateable whether certain asset classes should make their way into portfolios.
They also wondered whether capital markets had the capacity to cope if there was a coordinated push into using a risk parity framework – it was agreed that they did not.
The next panel illustrated how a tradition 60/40 asset allocation had done investors a disservice for over 100 years. Dr. Bradley Jones, an independent consultant, said that over the past 110 years, portfolios with a 60/40 asset allocation had lost money one in every three years.
Jones also warned attendees that diversification was not as simple as it seemed, and they would have to look more deeply into their holdings to better understand the correlation that was not immediately apparent.
Investment outsourcing was one of the most vocal panels of the day with panellists divided on their feelings towards the approach. Attendees were told that the size of mandates awarded to these outsourcing providers had grown from $100 million to $500 million in a few years as (mainly) corporate defined benefit plans struggled with meeting their long-term liabilities.
Questions were asked about how investors could be sure they were getting the best execution and fund managers from their provider, and wouldn’t the high level of due diligence necessary wipe out any benefit of farming out the responsibility?
The session on liability-driven investing reminded attendees that providers realised that ‘pension funds are like snowflakes – they may look the same from a distance, but fundamentally they are very different’.
Lunch in the North and Biddle Dining Room fortified attendees for the next session on the increasingly tested world of custody and asset servicing.
The panel discussed issues in transition management and how investors should establish the rules of engagement with providers before setting out on a relationship. Recent law suits centring on FX fees and transitions meant the sector was under the spotlight than ever before in terms of money earned, for what and potentially at the expense of whom.
Attendees were then invited to the west coast of the United States, as two industry stalwarts re-enacted their regular dinners, chewing the cud over market movements and problems.
They talked about Europe’s problems being far from over, how Ben Bernanke, Chairman of the Federal Reserve, was getting ready to launch QE3 (by any other name) and how a devaluation of currency was the only way to compete with emerging market economies that had all done it years previously.
A fireside chat with one of North America’s largest asset pools shed light on how some of the largest direct investments over the past five years had been done. Investors were urged to ask providers on the buy and sell side to do more for them for free, as a potential sale was enough to get their pulses racing.
The final panel looked at alternatives and how investors chose and used them in their portfolios. They agreed that hedge funds were ‘confused’ as they had not changed their outlook in the past ten years and pension funds had perplexed them by looking at how their activity affected their overall portfolios, rather than just how much alpha they were producing.
Attendees then retired to the Cambridge Room for some well-earned cocktails and further informal discussion on points raised over the day.
The conference continues today – you can follow tweets at @ai_cio