Get ’Em While They’re Young (and Old)

It's all about strategy in staffing investment departments at public pensions and sovereign funds, according to a new white paper by AIMCo Deputy CIO Jagdeep Bachher and economist Ashby Monk.

(July 31, 2012) – Staffing seems to be an intractable problem for public pensions: How can a fund attract top financial talent with a civil service budget? And if that fund is in, say, Edmonton, Alberta? Tough luck, right?

Wrong, according to Alberta Investment Management Corporation’s (AIMCo) Deputy CIO Jagdeep Bachher and Ashby Monk, a geographic economist at Stanford. In a white paper published July 30, Bachher and Monk took on the issue of recruitment for public pensions and sovereign funds in the “the frontiers of finance” (i.e. anywhere that isn’t New York, Tokyo or London). The pair investigated HR strategies for the investment departments at 12 institutional funds scattered around the world, and concluded that “a dash of creativity and innovation is required to compete successfully” with the private finance industry.

From these case studies, Bachher and Monk identified three characteristics common among investors most attracted to working at public funds in out-of-the-way places: youth, age, and roots in a certain area.

“Put simply, we think public funds should recognize how they differ from the mainstream and tailor their human resources strategies accordingly. In fact, they may get closer to actually achieving their objectives by targeting a different type of employee altogether,” the authors wrote. By targeting those at the beginning and end of their careers, as well as professionals with strong connections to a given city, public funds can get more talent for less cash—Bachher and Monk call it the “moneyball approach,” after Michael Lewis’ book on the Oakland A’s baseball team.

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Bachher has been successful with this strategic approach at AIMCo, a C$70 billion public umbrella fund. On hiring young, for example, the author’s wrote: “AIMCo is generally quite competitive at attracting early-career individuals that are ‘rising stars’ in the organizations they are in. At the early stages of an individual’s career, the disparity between AIMCo’s salaries and the private sector salaries are low (or even in favor of AIMCo). Moreover, the opportunities for career development at AIMCo are far superior to those in the private sector, as young employees that demonstrate skill and are reliable tend to receive responsibilities far exceeding peers in the private sector.”

The paper concluded, “tomorrow’s public funds will want to re-consider the very nature of finance and investment and the objectives of their organization…And the people they hire to achieve these goals should be expert at these tasks. In other words, public funds will have to re-conceptualize the types of people that best align with the fund’s objectives; this is ‘moneyball’ finance.”

To read the whole paper, click here.

The Federal Reserve’s August 1 meeting could bring news of a fresh round of quantitative easing, something that could bring ecstasy to markets but some pain to institutions investing against liabilities.

(July 31, 2012) — A Federal Reserve meeting on Wednesday could cause markets to surge at the same time it sparks consternation for certain institutional investors.

The Federal Open Markets Committee (FOMC) meets on August 1 and some are speculating that the Federal Reserve could use the occasion to announce a fresh round of quantitative easing (QE). Though monetary stimulus may not be forthcoming Wednesday, certain institutional investors have mixed expectations about it, underscoring the conflicting tensions affecting their fund integrity.

While “QE initiatives that improve equity returns are obviously helpful to pension funds,” explains David Service, director of Towers Watson’s investment consulting arm, falling Treasury yields increase their liabilities. As a result, he says, “how the QE would be delivered and how it affects the two markets is therefore critical” in the eyes of pension plans.

Many institutional investors, particularly pension and insurance funds, invest against liabilities, which are calculated using benchmark interest rates. When interest rates are low, as they have been since the 2008 financial crisis, liabilities spike and underfunding grows. In countries with relatively sound fiscal positions, such as certain Northern European nations and the United States, capital seeking “safe” sovereign debt has depressed interest rates so much that regulatory rules have been changed to ease institutional investor pain. QE by central banks can exacerbate those already inflated liabilities even further; some have even gone as far as accusing the Federal Reserve, for example, of “destroying pension funds.”

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At the same time, QE can rouse equity markets, raising performance for the portfolios of institutional investors. When central banks lower interest rates, capital floods into equities as investors chase returns. Last week, markets surged after the president of the European Central Bank vowed to do “whatever it takes” to preserve the Eurozone, an allusion to what many investors took to mean as a willingness to purchase Spanish and possibly Italian sovereign debt.

Data last week revealed that the US economy had grown a tepid 1.5% from April through June, deepening fears of a possible recession and fueling expectations that the Federal Reserve would take action.