CIO Summit London Round Up | Chief Investment Officer

(June 28, 2012) — On a humid, drizzly Tuesday in London town, 70 of the biggest and brightest in institutional investment joined aiCIO to discuss portfolio construction, investment strategy, and the economy in general at our annual European conference.

The first panel, held at 8 Northumberland Avenue, a former gentlemen’s club found a stride from the Thames, addressed ‘risk’. Panellists Bernard Walschots, CIO of Rabobank Pension Fund, Evalinde Eelens, senior investment strategist at A&O Services, and Erik D Gosule, head of client solutions at PanAgora Asset Management (a conference sponsor) talked through how risk-based approaches could be woven into portfolio constructions – and to what end.

The panel was divided on the benefits of risk parity, but agreed that approaching investment from a ‘risk-based perspective’ was key to investing both in the current volatile economic environment and in more balanced climates.

The next panel addressed fiduciary management in its many guises: implemented or delegated consulting, investment outsourcing and many others.

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Chetan Ghosh, CIO of Centrica Pension Fund, Jerry Moriarty, chief executive of Irish Association of Pension Funds, and Markus Barth, global head of CROCI Investment Products at Deutsche Bank agreed there were different levels of delegating responsibility and that there should be no ‘one-size-fits-all approach’.

The main concern for panellists was that some investors were being ‘rail-roaded’ by their consultants into taking their product in this arena as they were ‘easy targets’. “Just because they are your best option as a consultant, they may not be your best option as a fiduciary manager,” said one. The others called for mandatory tendering processes for this approach.

After coffee, Francesco Curto, global head of CROCI Research at Deutsche Bank – the conference’s platinum sponsor – explained the unit’s approach to investing in equities. Curto said: “The CROCI Global Dividend process selects stocks that screen well on both dividend yield and ‘real’ economic price to earnings ratio by avoiding the stocks most at risk to future dividend cuts and subsequent poor price performance.”

For more details on this approach – click here.

The alternatives panel featured investors who have both given over around 25% of their portfolios to investments outside of the mainstream. Larissa Benbow, head of investments at HBOS Pension Fund, and Richard Moon, investment manager of alternatives at Railpen Investments talked about which sectors they were looking at and what standards they demanded from their providers in terms of performance and governance.

Guest moderator Chris Jones, head of alternatives at consultants bfinance, asked what investors should have learned over the crisis – the panellists responded that investors should realise the best managers will never drop their fees and lock-ins and gates should no longer be tolerated.

Lunch was served in the former billiard room and attendees took time to ‘network’.

After the break, Rob Gardner, co-founder and co-CEO of consultants Redington guest moderated the liability-driven investment (LDI) panel, featuring Ian McKinlay, CIO of the Pension Protection Fund, Marcus Hurd, principal & actuary at Aon Hewitt, and Stefan Lundbergh, head of the innovation centre at APG and Board Member, AP4.

The panel agreed that in theory, investing with liabilities as the only pure target was sensible, but deciding how to do it relied very much on the starting and ending point. One panellist said it was important funds did not fall in to the trap of ‘assumption-based investing’.

Securities lending took centre stage for the next panel. Industry expert Roy Zimmerhansl led the panel in debate over changes to the industry’s practices in the aftermath of the financial crisis and what investors could expect when launching such a programme.

Kevin McNulty, chief executive at International Securities Lending Association, Leandros Kalisperas, head of credit at the Universities Superannuation Scheme, and Simon Lee, senior vice president at sponsor eSecLending, debated the issues, using case studies to better illustrate the pros and cons of lending out portfolios.

After tea and scones in the billiard room, attendees returned for the final ‘fireside chats’.

In the first of these less formal panels, Erik Knutzen, CIO at NEPC, and Crispin Lace, director of consulting & advisory services at Russell Investments offered thoughts on how investors in Europe could track down returns without ramping up their risk in the uncertain climate.

The pair suggested investors returned to examine active management and dynamic strategies, certain illiquid credit opportunities and some emerging markets. Other areas to consider included distressed European corporate debt and insurance-linked securities.

The final panel saw the architects of the CERN pension fund giving an update on their progress, some two years after explaining changes they intended to make at the previous aiCIO Summit in London. Theodore Economou, CEO, and Gregoire Haenni, CIO, illustrated to the conference how they select and gauge the performance of fund managers using a technique akin to DNA sequencing.

They also demand the managers donate a certain amount of their fees earned on their account to charity.

Networking cocktails (and some of the most creative canapés in London) were served as attendees continued to discuss the themes of the day and at 7pm it was all over for another year.

Thanks to our sponsors: Deutsche Bank, eSeclending, Panagora, Aviva Investors, Bridgewater Associates, and Standard & Poor’s Rating Services.

See you all next year – or in Sydney, Australia in November.

As many investors today are moving to protect against downside risk and meet fiduciary obligations by derisking, they continue to seek income and return, according to a recently published study by Wellington Management.

(June 27, 2012) — With yields on high-quality bonds yielding low interest, it’s hard to find income in fixed-income, says Lori Whiting, investment director at Wallington Management.

“One solution is a diversified multisector credit portfolio, with a focus on higher-yielding credit sectors and securities whose mix shifts with changes in market conditions,” she advises in a newly released whitepaper. She notes that this approach to credit can help meet the desire for income while retaining the downside protection a fixed-income portfolio can provide.

According to Whiting, across credit sectors, some of the best opportunities for investors are in high yield, bank loans, and non-agency residential mortgage-backed securities (RMBS).

Nevertheless, exploiting the income and return potential of credit sectors does not come without risk. “By definition, investment in these sectors entails credit risk; a significant portion of the opportunity set is rated below investment grade. Furthermore, securities in these sectors are often callable, so the higher income and yields they offer could be cut short if falling yields lead obligors to buy back their high-coupon debt,” the paper asserts.

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The low yield among bonds is a familiar story. Last year, research by the London Business School and Credit Suisse noted that bond investors should expect less robust returns in the future. London Business School’s Elroy Dimson commented: “We are struck by the volatility of the size, value and momentum effects. Over the long term, all three factors have provided a positive risk premium. But over shorter intervals, these premia can easily go into reverse.”

The authors of Credit Suisse’s report found that bond investors should not expect returns for the next 11 years to be as strong as those of the previous 11 years, largely as a result of rising inflation. While bonds in 19 developed markets worldwide outperformed stocks in the 11-year period ending December 21, 2010 by an average annualized 3.2 percentage points, the outperformance of stocks over bonds in the same countries has been by 3.8 percentage points since 1900.