Delegates at the recent Association of Superannuation Funds of Australia (ASFA) conference in Brisbane were told that there would be new ways of investing in a changing investment environment in 2004.
Standish Mellon Asset Management chairman Ted Ladd said the world was expected to experience unexciting but positive economic growth in the year ahead where financial returns were likely to be mundane.
He could not envisage a big rise in price to earning ratios and noted that market volatility was also likely to be quite high. The latter, he said, was the result of vast improvements in communications and technology which, together with the integration of global capital markets, had resulted in quicker responses to global events.
Deutsche Asset Management CEO Paul Berriman said words like ‘modest’ and ‘mundane’ did sound right in describing market returns next year. Returns of around 6-7 per cent a year could be expected, which would not be enough to ensure adequate retirement savings for super members.
As a result, the ways to make money in the future would have to be different to those in the current investment regime. “We will have to seek further alpha in ways not done before,” said Berriman.
He said the way portfolios were constructed would have to change and investors would have to become more focused on total return as opposed to relative return.
“It will also mean not owning stocks we don’t like rather than being underweight in those stocks,” he predicted, adding that investors would be looking to invest in good companies and would engage in more dialogue with company management.
Credit Suisse Asset Management (London) deputy chairman Bob Parker said 2004 and 2005 offered clear opportunities and traps to investors. It was, he noted, simplistic to believe that 2004 would be a year of easy trends. Instead, the prospects for global bonds were unexciting and the significant equities market rally seen this year would start to moderate.
Parker said there was more potential to earn incremental rewards from hedge funds and real estate than from cash and, he forecast, there would be greater diversification into commodity markets because these had a low correlation with other asset classes and could act as a hedge against inflation.
Parker predicted that the trend towards performance-based fees would accelerate, adding that this was good news for both clients and investment managers.
Ladd agreed, noting: “This is a challenge for fund managers… It is new and different and will test our collective value.”
Watson Wyatt’s Sean Hanaghan advocated a move away from benchmark hugging and short-term investment horizons.
He said asset consultants had been the key drivers behind the introduction of benchmarks in the early 1970s in a bid to encourage professionalism in the industry and to create a way to compare the performance and skill of different managers.
However, asset consultants were now more sophisticated and could measure managers without benchmarks. Indeed, benchmarks were no longer the best measure of skill.
“If you give managers a benchmark and then ask them to move away from it, they won’t. The risk of underperformance is just too great,” said Hanaghan.
“Many institutional portfolios are holding stocks that managers don’t necessarily believe will perform. They are holding these because they are in the benchmark. It makes no sense. Capital is scarce. Why use it if you think a company will not perform?”
Hanaghan’s advice to investors is: “If you believe in the skill of a manager, let them exploit it. That’s what you are paying them for.”
Hanaghan also pointed to the increasing “short-termism” in investment markets. He said the level of turnover had increased over the past 12 years, on the back of a focus on quarterly performance. The result was that returns got worse after brokerage and other trading costs.
“We are saving for the long-term, but the business pressures mean a short term focus,” he said.
