The low-yield environment in many of the world’s largest bond markets is unlikely to change soon, and asset owners need to adapt by shifting investment strategies and adopting a genuinely long-term perspective, argued a panel yesterday at the FT Investment Management Summit Asia in Hong Kong.
Henrik Lumholdt, a professor for asset allocation economics at the IE Business School, said higher rates were unlikely to return soon, so asset owners needed to allocate more to illiquid alternative investments, such as private equity and real estate, to boost yield.
However, one factor that may make it difficult for asset owners to envisage and execute long-term investing is the conflict many chief investment officers or fund managers face between their strategic and career goals.
“As they grow, funds taking a long-term view face long-term pressures,” said Naomi Denning, managing director of investment services for Asia-Pacific at investment consultancy Willis Towers Watson. “But executives are not going to be in charge of assets for 10 to 20 years, and this can stop them taking that mindset.”
In other words, career concerns leave these professionals inclined to make uncontroversial capital market investments that may underperform targets, but are easier to manage.
Speaking on the sidelines of the conference, the chief investment officer of a large asset owner supported the point. When asked by AsianInvestor why insurers and pension funds were not admitting to the public that their return targets were too high in this low-rate environment, he said: "I think a lot of it is to do with inertia.
"Many investment professionals only want to get through their jobs without rocking the boat," he noted. "Admitting you can't hit your returns risks a lot of upset and anger, so it's easier to keep your head down and try to keep things ticking along."
Another question that investors should be considering is whether their portfolios are well insulated against future financial crises, said another panelist.
“There is no doubt that our animal instincts affect markets, and we are in the middle of the [period between the] last crisis and the next crisis,” said Barry Blattman, senior managing partner at Brookfield Asset Management.
“We can’t say we’ve learned all lessons and that it won’t happen again,” he added. “It will, and so how well you set up your portfolio to handle a crisis will dictate if you’re successful in the long term or not.”
One factor that asset owners are increasingly looking at when it comes to long-term investments is passive investing, given the propensity for passive funds to outperform their active rivals over the long term. This has led to questions over the value of active fund managers over longer periods.
However, Blattman said they still serve an important purpose. “Someone has to do the fundamental analysis of companies to know if they are trading below or above value,” he said. “When we get to a period of crisis, it’s going to matter that we understand … what the companies [we are investing in] have done with their cash and that they have opportunities in the fundamental business to make returns on equity.”
However, passive investing does look set to have an industry impact over the longer term, thinning out the herd of active fund managers, acknowledged Denning.
“Any investor at a large institution has a limited time to spend on decisions. One of those is whether to go active or not,” she said. “We all know that half of active investors outperform and half don’t, and when you add in fees it’s a tough game [to stand out with good returns].
“My belief is that as we move to individual investing, robo-advising will increase and the chances of [asset owners] shifting to active management is much lower,” added Denning.
Yet despite all this, Jean-Louis Nakamura, Asia chief investment officer at Lombard Odier Investment Managers, argued there would always be a place for humans in the investment process.
“I’m a big fan of systematic strategies so robo-advisers are a great tool to take advantage of systematic strategies,” he said. “But you need people; humans have to explain the value of robo-advisers to other people.”