Bad vs. Basic | Chief Investment Officer

CIO_Opinion_Kip_Photo_Story If you have a teenage daughter, and she feels comfortable openly cursing at home, you will have heard 2014’s most cutting label: The Basic Bitch.

An explanation, via New York magazine:

“Basic… means someone who owns things like Uggs and North Face and leggings. She likes yogurt and fears carbs (there is an exception for brunch), and loves her friends, unless and until she secretly hates them… She exercises in various non-bulk-building ways, some of which have inspired her to purchase special socks for the experience. She bought the Us Weekly with Lauren Conrad’s wedding on the cover. She Pins. She runs her gel-manicured hands up and down the spine of female-centric popular culture of the last 15 years, and is satisfied with what she feels. She doesn’t, apparently, long for more.”

This is the opposite of—as younger members of my staff inform me—the highest compliment a Millennial can earn: being a Bad Bitch. She (or he, or them, or it—most anything can be bad) is everything basic is not. If she were to deign to go to Starbucks, it wouldn’t be for a pumpkin spice latte; she does not identify with a certain character from “Sex and the City” (e.g. “I am such a Carrie.”); she likely has a bad (by which I counter-intuitively mean highly successful) job in a bad (desirable) city with a bad (original) sense of class and fashion. Bad, at its core, means impressive.

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And how, you are rightly asking, does this apply to our annual de-risking issue? Because for this magazine, we sought to find out what and who were bad, and what and who were basic, in the ongoing competition for the finite asset pools that are moving en masse away from risk.

It starts with our cover story. Despite the perils of critiquing the very companies who pay our salaries through advertisements, I attempted to lay out the current battlefield of the liability-driven investing (LDI) market: Who’s basic, who’s bad, and who’s poised to switch from one label to the other.

Of course, there are always those firms and funds not following the well-trodden LDI path. Assistant Editor Sage Um investigates this group—fund-of-funds PAAMCO and private equity giant KKR, among others—to find out if their de-risking alternatives actually accomplish what sponsors demand.

And perhaps most revealing are the results of our annual liability-driven investing survey. For the second time, we’ve asked LDI clients to rate their vendors. Nothing is more basic than failing to impress the people who hire you—find out how the bad versus basic breakdown plays out when it comes to leading LDI providers NISA, Legal & General Investment Management America, PIMCO, BlackRock, and JP Morgan.

No manager wants to be basic, but just like with pension magazines, some are and some aren’t. We aim to figure out which is which—and in doing so, we hope to earn the bad label ourselves.

Asset allocation drives just half of portfolio performance among European pension funds, according to new research.

A report by Amundi Asset Management and Create-Research said that just as important as selecting asset weightings is the implementation of these decisions—and all parts of the chain must adapt.

The companies referred to implementation as “the alpha behind alpha”, and argued that its significance had risen in recent years due to the increasing influence of politics on financial markets.

“Investors no longer manage risk, they manage uncertainty: the first relies on known probabilities of future returns, the other on guesswork,” said Pascal Blanqué, CIO of Amundi Asset Management. “Pension plans have been enjoined to explore new horizons in the belief that markets are unlikely to normalise any time soon.”

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“Without greater collaboration between pension plans, their consultants, and their asset managers, the new changes risk being as durable as the crisis that provoked them.”—Amin Rajan, CEO, Create-ResearchThe research echoes similar comments by Russell Investments in the summer. Associate Director Lloyd Raynor—who is leaving the company to join Insight’s liability-driven investment team—said in July that a focus on asset allocation alone could be inappropriate for some portfolios.

Amundi and Create found that, in response to this change, roughly half of the 190 European pensions surveyed had made “significant” changes to their business models—specifically regarding asset allocation, governance, and execution.

In turn, Create-Research CEO Amin Rajan said service providers also had to adapt to the new needs of pension funds, and develop a better understanding and appreciation of individual pensions’ long term goals and risk tolerance.

“Without greater collaboration between pension plans, their consultants, and their asset managers, the new changes risk being as durable as the crisis that provoked them,” Rajan said. “It is one thing having new asset allocation models for a new age, quite another making them work. It’s time to leverage the collective expertise in the pension value chain.”

The report also warned that tougher tests of new business models were yet to come, having so far benefitted from strong equity markets in the past three years.

“The real test will come when markets go into turmoil,” Amundi and Create said. “Most of the changes have not yet been tried and tested by time or events.”

The report surveyed 190 pension funds across Europe with assets of €1.9 trillion ($2.4 trillion).

Related Content: It Ain’t What You Do… & Bad Habits in Asset Allocation