Hot topics from our Institutional Insights conference

The second annual Institutional Insights conference hosted by Sanlam Investments in Sandton last week focussed the spotlight on the challenges facing asset owners and fiduciaries.  The agenda featured an acclaimed panel of speakers from across the globe , including Dr Philippa Malmgren, distinguished strategist and former economic advisor to US President George Bush.  Together the speakers addressed the impact of geopolitical events on capital allocation, asset prices and investment portfolio strategies, the need for better governance frameworks, and the twin burdens of demographic change and economic shifts.   The event was opened by former Sanlam Group Chief Executive, Johan van Zyl.

Says van Zyl, the day was about “How we guide the process of making those critical capital allocation decisions in a world of volatility and change.  Making the right call is the hardest part of the process in protecting and growing the assets you are responsible for.  Our role is to help you get your strategy right and adapt it when you need to, to capitalise on opportunity and unlock value”.

Added Cora Fernandez, Chief Executive of Sanlam Investments’ Institutional Business:  “Legislation, fragile global growth and systemic changes in the financial service sector is making it very difficult to allocate capital.”

Speakers at the conference agreed that global geopolitical turmoil, rapidly changing demographics and volatile markets have thrown significant challenges at today’s retirement fund trustees, faced with the knowledge that the traditional models of asset management have changed forever.  It is imperative that fund trustees now adopt new strategies to both protect and grow their members’ long-term retirement savings.

Bart Heenk, Managing Director of Avida International, said retirement fund management had become far more complex than ever before, and pension funds had to adopt better governance and risk management practices. For many boards this would mean delegating certain decisions to the experts, as the operational burden that rested on the shoulders of trustees consumed a significant amount of their time and focus.  It was critical, however, for retirement fund boards to remain keenly involved in the important investment decision-making process.

Roland Rousseau, head of the Barclays Risk Strategy Group, made the point that one of the key things changing the entire industry was how we define and measure real skill. According to Rousseau, it’s not about beating a benchmark or a peer group.  And never make the mistake of confusing higher returns with skill; you can beat the benchmark without actually demonstrating any skill.  Rousseau said the new definition of skill was about understanding the critical role played by risk, as well as the interplay of active and passive together to deliver dynamic risk control.

Says Rousseau, the future belongs to risk managers not return managers.

Wade Matterson, Principal and Practice Leader at Milliman Australia, noted many similarities between the environment Australia and in South Africa, particularly the convergence of a number of trends, including macroeconomic, demographic and technology. He called this “the perfect storm”.

Ongoing retirement fund reform had made it difficult for funds to innovate, particularly since they all had an eye on costs.  However, Matterson said, changes to Australia’s “superannuation” model of pension savings had allowed forward-thinking players to aggressively tailor their solutions to individual needs.

“The Australian industry has disrupted traditional life-cycle models and offered so much more engagement and opportunity,” said Matterson. “However, with all the new products, technology and tools, the need for better governance has risen exponentially”.

Dr Amlan Roy, Head of Global Demographics and Pension Research at Credit Suisse in London, said a proper understanding of the real drivers of demographic change were essential to sustain the promises a fund makes to its members. It was a mistake to lump people of similar ages into boxes, when their spending and saving habits might be fundamentally different, he said.

“Hybrid solutions” were required by the financial services industry to match a consumer’s expectations with the right product or investment strategy. Moreover, he said, most longevity models were hopelessly flawed, and new prototypes were needed to develop accurate retirement solutions.

Dr Philippa Malmgren, strategist and founder of the DRPM Group, spoke about the breakdown of the ‘social contract’ and the rise of geopolitics, with its ensuing impact on pension fund investors. Geopolitical issues have a profound effect on investment strategies and results, bringing  both risks and opportunities onto the investment landscape.  For this reason, it was vital that fund trustees educate themselves about the global geopolitical landscape and how to profit from the next wave of growth, innovation and entrepreneurship –  driven by entrepreneurs who can put capital to work by being risk-takers.