Now, while this sentiment from many of Europe’s, and the world’s, pension fund advisers is very positive, there are elements to the collective thought process that are concerning.High above any other is the sentiment for one’s own home market. For all regions, including the aggregate of local sentiment, the percentage of respondents suggesting their local economy would grow in 2014 fell in comparison.While a common British saying – the grass is always greener on the other side – may explain the respondents’ thought process, it does not excuse it.As 63% remained optimistic, there is also the one-third of respondents that said weak economic growth and conditions were still the biggest risk to investments.Some 71% of the respondents – 61 percentage points higher than any other asset class – also feel equities will provide the highest returns in 2014.The majority of respondents said they anticipated a financial bubble being created in their local markets over 2014. However, they expectedly split on deciding where. Asia Pacific was the exception, where 52% said the bubble would be created in real estate.All of this gives an insight into the effects that undue optimism, market crowding, sentiment following and disregard for the absence of fundamentals and facts can have on investors.The expected growth in equities is the most concerning, possibly due to the fact that what we are seeing in markets is what we have all seen before.With 71% of advisers believing equity markets will grow, investors will duly allocate swathes of finance towards the asset class.However, taking the UK stock market, for example, its high this year is still 85 points below its previous 6865.86 high seen in 1999, at the height of the dot.com bubble.Many market commentators have suggested that high will be trodden into the past as the FTSE breaks the 7,000 mark later this year, or even the 7,500 mark.However, among all of this, and among the respondents to the survey, is the sometimes reckless approach to being sucked into positivity, and this is positivity without basis.The UK economy is still smaller than its peak in 2007, as is much of Europe. Yet equity markets in both the UK and the euro-zone are on full alert for allocations, with almost little consideration for how companies will react to inevitable rate rises.As long-term investors, pension funds should try and avoid being swept up in market sentiment, and be wary of bubbles.If sentiment cannot collectively show where growth will come from, then sentiment should not be dictating allocations. The CFA Institute’s latest survey once again shows that even investment professionals are not immune to behavioural economicsThe latest version of the CFA Institute’s Global Market Sentiment Survey once again shows how even investment professionals are susceptible to the clear callings of behavioural economics.The survey, conducted by more than 6,000 of the institute’s members worldwide, found positive sentiment was on the up in all regions.Some 63% of the financial analysts who took part in the survey were swayed by positive market reactions in 2013, and said 2014 would see the global economy expand.
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It also amended its core investment belief on management style, backing alternative indexation processes over basic passive, although sticking with those being more advantageous than active management.The fund will also begin integrating valuation considerations of investments and put economic conditions and long-term market development at the heart of its allocation choices.NEST’s default investment strategy comprises four different funds, depending on where the member is in their retirement cycle.The foundation phase for younger members in their 20s, which invests in risk assets but more aversely for capital preservation, returned 3.67%, 2 percentage points above benchmark.Its main growth fund, in which some members can be invested for 30 years, returned 4.39%, slightly below its 4.67% benchmark, but close to 3 percentage points higher on a three-year basis.The fund comprises of a mixture of equities, accounting for around 50% of the portfolio, with other classes including property and high yield.NEST also recently announced the potential inclusion of emerging market equities in its growth fund, starting with an approximately 1.5% allocation.It selected two alternative indexed EM equity funds from HSBC Global Asset Management and Northern Trust Asset Management.Its higher-risk fund option, for members to choose outside of the default, returned 6.3% over the year and 9.84% on an annualised three-year basis.The lower-risk fund returned 0.39%, above its benchmark on both an annual and a three-year basis.However, NEST’s Sharia Fund option, for members of the Islamic faith, once again performed below its benchmark, returning 7.09% compared with 8.1%.The master trust said this was due to the lagging nature of Sharia-compliant investments.“There can be create greater tracking margins than you might find in non-Sharia funds,” it said. “The nature of Sharia-compliant investing means funds may not be changed immediately in order to exactly match the index.”The final overall asset allocation sees the fund with around 40% in developed market equities, 17% in property, 13.4% in UK corporate bonds and 12.3% in money market instruments, with additional allocations to global sovereign bonds, index-linked bonds and small-cap equities. The UK’s National Employment Savings Trust (NEST) returned a marginally below benchmark 4.4% over its 2013-14 period, with strong gains in developed market equities.The fund, which said this week it had reached £162m (€204m) from £104m at the end of March, has also made two additions to its investment beliefs for the coming year.NEST, created through state backing to service the development of auto enrolment, now has more than 1m contributing members, up from 81,000 a year earlier.In addition to its original seven investment beliefs, the fund has said an “appropriately resourced” in-house investment team would be the most beneficial to its members, hinting towards further growth in its internal capabilities.
The state secretary also compromised on her initial plan to block pension funds with a funding shortfall from adding risk to their investment portfolios.Klijnsma said pension funds with a coverage of at least the required minimum funding of 110% would be allowed to adjust their strategic investment policies once.She said a second adjustment would be permitted only if a pension fund opted for a dynamic hedge of the interest risk on its liabilities.Klijnsma conceded that pension funds could circumvent the investment restrictions by chosing a relatively high strategic risk profile in 2015, when the new FTK is to come into force.“However,” she said, “pension funds must consult their social partners, as well as their internal governance bodies, about their risk attitude.”The two coalition parties of the PvdA and the VVD, as well as the CU, the SGP and the D66, also made clear that they wanted the prescribed discount rate for liabilities to mirror the future European discount rate for insurers.Meanwhile, industry organisations for the elderly warned that the update of the FTK might be at odds with European rules.In a letter to Klijnsma, the KNVG, the CSO and the NVOG called for a delay in the FTK’s reading in Parliament, until such a time as the bill had been been checked against EU legislation.Parliament is to decide on the FTK proposals on Wednesday evening. Dutch state secretary Jetta Klijnsma has secured a majority in Parliament for her proposals for a new financial assessment framework (FTK) by making concessions on indexation and investment policy.During consultations in Parliament on Monday, she said she would ease restrictions on inflation compensation by allowing pension schemes with a coverage ratio of more than 126.6% to grant indexation in arrears over a five-year period, rather than the proposed 10 years.However, many Dutch pension funds’ coverage ratios are at less than 110% – the level at which schemes can start granting inflation compensation under the new FTK.Klijnsma made the concessions under pressure from three opposition parties – the CU, the SGP and the D66 – whose support is crucial to achieve a majority in the Senate.
Robert Dickinson, chair of trustees to the scheme, said the £210m deal was the next stage in the scheme’s de-risking plan.“I am delighted that, despite the turbulence in the markets during the past few weeks, we were able to move ahead with the transaction,” he said.PIC actuary Uzma Nazir added: “The Aon Minet scheme trustees have taken further steps to de-risk. “Doing this in tranches, rather than waiting until full buyout funding is achieved, is becoming an increasingly common approach.”In other news, Aon Hewitt, has urged UK pension schemes to consider the use of escrow accounts as an alternative means of funding deficits.Publishing a white paper, the advisory firm cited several “myths” over the use of escrows in pension scheme funding, hampering their use.An escrow is a temporary account used between the sponsor and pension scheme, with funds held and taken on board by the scheme (if funding falls) or retained by the sponsor (if funding improves).Lynda Whitney, partner at Aon Hewitt, said the use of escrows could be useful, particularly for companies with cash capacity but that do not want this tied up in a pension scheme, should funding improve organically.The paper sets out to dispel other common misconceptions on escrows – the accounts are used only for cash, they are disliked by The Pensions Regulator (TPR), or they are expensive, or inappropriate for schemes in deficit.“An escrow can have a role in either deficit management or the management of the risk of trapped surplus,” Whitney said. “In relation to a deficit, it can bridge the gap between trustees and sponsor viewpoints on pace or level of funding.” The Aon Minet Pension Scheme has completed its second bulk annuity insurance buy-in with Pension Insurance Corporation (PIC). The latest deal covers around £210m (€269m) of pensioner liabilities, adding to its previous £100m transaction two years’ previous.Aon Minet, an insurance brokerage company and part of the multinational Aon Corporation, and the trustees of the scheme re-selected PIC after a competitive tender process.Sister organisation Aon Hewitt led the negotiation on behalf of the scheme, with legal advice provided by Hogan Lovells.
Further IPOs are scheduled to take place over the next months, including those of energy companies Hidroelectrica and CE Oltenia, as well as postal service company Posta Romana.The Romanian government is also discussing the privatisation of infrastructure assets such as Bucharest Airport.Although the government’s objective is to increase investment by international institutions in Romania, the IPOs are also expected to benefit local pension funds, which have taken part in the strong growth of the domestic stock market.According to Lucian Anghel, chief executive at BCR Pensii and chairman of the Bucharest Stock Exchange, Romanian pension funds acquired between 15% and 30% of the shares issued in the major IPOs completed so far, and held more than €700m of Romanian equity on the exchange as of last year.Among the investors that have participated in the IPOs of Romanian state-controlled companies is Fondul Proprietatea, a €2.9bn closed-end fund managed by Franklin Templeton.The US asset manager, which had more than €640bn in AUM as of last year, is heavily involved in Romania as sole manager of Fondul Proprietatea.The fund was created in 2005 to compensate Romanians whose properties were confiscated by the Communist regime.This week, Franklin Templeton completed the secondary listing of Fondul Proprietatea on the London Stock Exchange, saying the deal represented a “truly historic milestone”.The listing, originally scheduled to take place last year, was pushed back when the Romanian financial regulator delayed the approval of new rules that would allow it to proceed to a secondary listing.Fondul Proprietatea’s shares will be tradeable on the LSE’s Specialist Fund Market as global depositary receipts (GDRs), as the fund becomes the fifth-largest closed-end fund listed on the exchange.The decision to list Fondul Proprietatea’s shares on the LSE was partly driven by pressure from shareholders, which include activist investor Elliot Advisors.Fondul Proprietatea, which invests in major Romanian companies including oil and gas producers, as well as unlisted state-controlled infrastructure projects, has rewarded investors with substantial cash distributions and share buybacks, and seen its share price increase by more than 70% since its inception in 2010.However, the shares have traded at a significant discount to NAV, and it is hoped the secondary listing on an international stock exchange will improve liquidity and eventually close that gap.The shares’ current discount to NAV is 20.81%, having decreased from 55.67% in 2011.Though corporate governance remains a concern for many prospective investors in frontier markets, Mark Mobius, executive chairman at the Templeton Emerging Markets Group, said the firm had witnessed a “complete change in psychology and orientation” towards governance, as authorities approved new rules and began enforcing best practices that make investment safer and more profitable.In addition to new regulations and a commitment to the IMF and EU-backed privatisation programme, Romania enjoys good economic fundamentals, with GDP growth forecast to reach almost 3% in 2015, and a public debt to GDP ratio of less than 30%.Thanks to the sustained growth of the country’s capital markets, Romania may soon graduate from frontier to emerging markets, providing additional investment opportunities and boosting confidence of domestic pension funds.Romania’s four mandatory second-pillar pension funds reached more than €4.2bn in total assets last year, having grown at an average of 11.2% since their creation in 2008.The voluntary third-pillar sector, launched in 2007, is made up of 10 funds with €221m in AUM and has returned 8.2% since inception. The Romanian government has set up a working group that will assess which of the remaining state-controlled companies are to be privatised and eventually listed on the Bucharest Stock Exchange.According to Dragoş Andrei, adviser to the Romanian Cabinet and a representative of Romania at the European Bank for Reconstruction and Development (EBRD), the country’s Finance Ministry will appoint experts to the group, including fund managers and investors, to establish which privatisations should be prioritised.Andrei said the move was consistent with the Romanian government’s “strategic decision to boost capital markets” and make them a “reliable source of financing for the economy”, at a time when the country’s banking sector remained under pressure. The Romanian government, in agreement with the IMF and the EU, is delivering an asset sale programme that culminated in the RON1.94bn (€440m) IPO of energy company Electrica in 2014.
De Ruiter said there was still much appetite for private equity investments and that the pension fund wanted to increase its current allocation from 6.5% to at least 7.5%.He said the selection of managers would be crucial, “as only the best managers will deliver good results”.He added, however, that he expected returns on new private equity investments would be relatively lower, “as current valuations are higher than they were a couple of years ago”.In other news, the €25bn Pensioenfonds ING reported a year-to-date return of 15.8% on its combined allocation to private equity and hedge funds. SPW, the €10.5bn pension fund for housing corporations, said its private equity holdings returned 12.5% over the first nine months of the year.Last week, the €20bn pension fund PGB and the €5bn PNO Media reported year-to-date returns for private equity of 15.2% and 21.9%, respectively. The €3bn pension fund for the technical research institute TNO in the Netherlands is planning to increase its allocation to private equity, its best performing asset class over the last decade.Commenting on the scheme’s year-to-date return of 13.6%, CIO Hans de Ruiter said the pension fund was now reaping the rewards of investments made in recent years.De Ruiter said private equity valuations had risen, as a consequence of repeated rounds of financing. “In the wake of predominantly flourishing equity markets, investments also had good exits through listings,” he said.
The regulations, a draft of which was published for consultation late last year, are keenly awaited by the LGPS, not least because of their efforts to comply with government deadlines in relation to the requirement for them to pool assets.Jeff Houston, board secretary for the Local Government Pension Scheme Advisory Board, told IPE the release of guidance before the associated regulations themselves had been published was an unusual step, and that it came amid “a frustration, both within the board and across all the funds, that these investment regulations are taking so long to come out”.Although it is unusual for guidance to come before the regulations, “if getting this guidance out first helps us to get the regulation quicker, then fine”, said Houston.He added: “Now that the guidance has been cleared, we hope we will see the regulations very shortly.”The DCLG did not respond to a request for comment.David Walker, head of local government pension scheme investments at Hymans Robertson, told IPE the guidance was “quite consistent” with the contents of the draft regulation and “what looks likely to be in the new regulations when they come out”.He registered some concern about the timescale for the new investment strategy statements, pointing out that the guidance gave a deadline of 1 April 2017, whereas the draft regulations had referred to a deadline of six months after their coming into force.“With the new regulations still to emerge, and if 1 April is still going to be fixed as the date, it potentially means the funds have quite a short window to respond to this to get the documentation in place,” he said.However, he acknowledged that the release of the guidance allowed the funds to “potentially start mapping out what their investment strategy statements might look like”.In line with the draft regulations, the guidance refers to powers of intervention in investment matters that the secretary of state will have in certain circumstances. Power of direction concerns These were met with some surprise and consternation when the draft regulations were published, and and the UK Sustainable Investment and Finance Association (UKSIF) was critical of them in its response to the government guidance.Chief executive Simon Howard said the association was “very concerned with the power of direction, whereby the secretary of state can direct a fund to make changes to its investment strategy, force it to invest in specific assets and transfer the investment functions of the administering authority to the secretary of state or a nominated person”.He added: “Once again, we call on the secretary of state to clarify that this power will only ever be used where an authority has breached its fiduciary duty.”The UK’s Pensions and Lifetime Savings Association (PLSA) previously raised similar concerns, calling for fiduciary duty to be made explicit in the LGPS investment regulations.UKSIF also expressed concerns with a requirement that local government pension funds’ policies must be in line with UK foreign policy, with Howard saying this could impact their ability to invest.Houston, at the LGPS Advisory Board, said the provision was one over which individual funds would “probably be scratching their heads” as they read and tried to digest the guidance, and that there would probably be a desire for more clarification, including about how, if at all, it might “kick back into our fiduciary duty to get the best returns”.Houston said he expected there to be “a nervousness” around the power of direction for the secretary of state, even though local authorities are used to situations where the government has powers of intervention – in social services or education, for example.The LGPS Advisory Board as a whole has not yet been able to review the guidance, but Houston said he expected it would want to be certain the powers of intervention were a “last resort”, and that the secretary of state would have to follow a “robust process”, with individual authorities able to make their case.UKSIF was positive, however, about the requirement for LGPS to have a policy on environmental, social and governance (ESG) factors and stewardship, as well as the new provision that the pension funds must explain their approach to social investment and the extent to which non-financial factors are considered in their investment process. Recently published guidance for the UK’s local government pension schemes (LGPS) has revived concerns about the potential power of the government to direct investment. Last Friday, 16 September, the Department for Communities and Local Government (DCLG) released guidance that gave the LGPS and associated industry a first glimpse of what will be required under new, keenly anticipated investment regulations.The regulations would move away from a schedule of limitations on pension funds’ investments to a more relaxed framework under which a LGPS would have more freedom to decide its own investment strategy.This is to be set out in an investment strategy statement (ISS), which will replace the statement of investment principles.
The Local Authority Pension Fund Forum (LAPFF) has called on the UK government to give “serious consideration” to winding up the UK Financial Reporting Council (FRC).In a hard-hitting attack on the UK audit and corporate governance watchdog, the LAPFF called for the FRC to be replaced with an independent companies commission.The LAPFF said: “One reason why the FRC is failing is because it was never set up properly in the first place. The Treasury Select Committee described the position of the FRC as ‘inexplicable as it is unacceptable’.“We agree and believe that Downing Street needs to take an active interest in the position of the FRC; it falls so far short of the standards expected in public life, it warrants intensive investigation.” LAPFF also noted that, despite being a public authority, the FRC is not fully subject to the Freedom of Information Act.The call came as part of LAPFF’s submission to a consultation on corporate governance from the Department for Business, Energy, and Industrial Strategy (BEIS). The consultation on the BEIS green paper closed on 17 February.The green paper sought comments on executive pay, strengthening the employee and customer voice, and corporate governance in large private businesses. The FRC plans to launch a separate review of UK corporate governance later this year.The LAPFF believes that the FRC has failed to enforce the Companies Act 2006 in respect of both the ‘true and fair’ accounting requirement and, more recently, in relation to the duty on directors to report compliance with s172 of the Companies Act. This requires company directors to act in the best interests of the success of their company.It says a director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”The watchdog recently told IPE that it needs additional powers to force directors to report on how they have complied with s172.In its submission to BEIS, it repeated its call to be given more powers.The LAPFF, however, claims that the FRC has got the law wrong.The forum told BEIS: “First, the FRC has cited a lack of prescriptive reporting methods in the legislation as the means to deny the prescribed purpose of the legislation.“The falsity of that argument is betrayed by the green paper itself, which sets out that the lack of prescriptive methods is deliberate to enable flexibility in delivering the prescribed purpose.”The LAPFF also argued that the FRC has misread s414(1) of the Companies Act and overlooked the fact that it already has the power to enforce reporting under s172.Meanwhile, the Department for Work and Pensions (DWP) also weighed into the debate over s172 in the wake of the BHS Pension Fund scandal.In its consultation response, the DWP said it wanted company directors to be forced to take specific account of both past employees and pensioners when discharging their duties.In support of its call, the DWP noted that Legal & General had warned that the BHS collapse was “perhaps more to do with the application of directors’ duties by those directors in question” than deficiencies in legislation.The DWP also noted that Legal & General had suggested that there was “scope for the application and enforceability of directors’ duties to be scrutinised through the courts” rather than through further prescription at this stage.
Fidelity International has changed its mind on its position on investment research fees and will now fully absorb the costs of external research.In a statement, the asset manager made clear it would no longer apply a research charge on any client account, irrespective of investment vehicle, client type or geographic location. Managers in the EU are required to unbundle research costs under MiFID II rules brought in last month.According to Paras Anand, chief investment officer for equities in Europe, the decision followed extensive discussions with clients and reflected Fidelity’s desire “to act continually in their best interests”.“A key part of our initial decision to implement the research payment account (RPA) was our desire to have a model that would treat all clients equally, whether they were captured by the MiFID II regulations or not,” he said. Source: Fidelity InternationalFidelity’s variable management fee model“The headline reduction in the baseline annual management fee of 0.10% for the VMF share classes, now combined with us absorbing external research costs, will make Fidelity an even more competitive and aligned proposition for clients,” Anand said.In the opinion of the asset manager, its VMF model offered a simple, transparent pricing formula, which would align the investment manager’s fee to investment performance.Fidelity indicated that the model was meant as an alternative to the flat rate charging structure dominating the industry, and to encourage investors to hold active strategies to account and assess performance over longer time horizons.Anand added that Fidelity had seen a “positive response and a strong level of engagement on the VMF model” from both existing and new clients.MiFID II, the review of the EU’s Markets in Financial Instruments Directive, aims to make the European market more transparent, efficient and safer.#*#*Show Fullscreen*#*# Investment research: A new regime dawnsThe advent of the new MiFID II regulations is fundamentally changing the way asset managers relate to research From the January edition of IPE: The RPA method pays external providers from money collected through an explicit research charge levied on individual investment funds, alongside transaction commissions on equity trades.Anand said Fidelity’s revised approach “is aligned with our single global research platform which underpins all our equity strategies”.According to the CIO, the overwhelming industry consensus has been to not embrace the RPA model, which in turn meant that Fidelity’s clients, in most cases, would face “disproportionate operational and reporting consequences”, were it to retain this approach.“These client challenges and inefficiencies were not what we envisaged,” he said, “so we have decided to move to a Fidelity-funded research model effective from 3 January.”Last October Fidelity moved to introduce a variable management fee (VMF) model across its active equity funds.#*#*Show Fullscreen*#*#
Asset management costs at Dutch civil service pension scheme ABP increased from 60.9 basis points to 64.5 basis points in 2017 – including higher fees to hedge fund managers, despite the scheme’s allocation losing 7.5%.ABP spent the most, in absolute and relative figures, on private equity and hedge funds, according to its annual report. For both asset classes the scheme increased its spending relative to 2016.Of ABP’s 64.5 basis points paid in total management costs, hedge funds and private equity accounted for 39.3 basis points.In absolute terms, ABP paid just over €1bn of management fees for private equity and €505m for hedge funds, on a total invested capital in 2017 of €18.9bn and €18.5bn respectively. This marked an increase in absolute and relative terms compared to 2016, despite a sharp drop in returns in both categories. Private equity generated a return of 9.7% (€1.7bn), compared to 14.8% in 2016. Hedge funds turned 7.9% gain in 2016 to 7.5% (€1.5bn) loss last year.ABP still spent more on costs because this performance was better than the asset classes’ benchmarks.Dutch healthcare scheme PFZW, which published its annual figures last week, also reported an increase in asset management costs. ABP stated that, just like PFZW, the increase was due to higher performance fees. Its management fees decreased.PFZW stopped investing in hedge funds in 2015 .ABP’s total investment return came to 7.6% for 2017, down from 9.5% in 2016.The board of trustees called the high costs for private equity and hedge funds “striking”, since the investments in these categories accounted for 10% of total assets while absorbing 60% of total asset management costs.However, the board said the high costs for private equity and hedge funds were justified because of their positive contributions to the scheme’s return and risk profile.Within the hedge fund allocation, the return on investment in US dollar-based hedge funds was positive. By partially hedging the currency risk, ABP booked a return of 3.4%. However, the effect of the dollar on the investments was still negative, meaning ABP lost €1.6bn on its interest rate hedge.The Netherlands’ regulator, De Nederlandsche Bank (DNB), reported in December that Dutch schemes’ management costs fell slightly during 2016, from 0.47% to 0.45% on average.DNB data collated by IPE’s sister title Pensioen Pro in March indicated that the country’s pension schemes were in aggregate reducing their exposure to hedge funds.