Since the global financial crisis, there has been an increasing trend for pension funds to give their managers “outcome orientated objectives”. For example, a goal, such as cash+x or CPI+y, that is aligned with the asset owner’s specific end requirements but with very wide discretion.
Binary
We believe asset owners should not have to make a binary choice between micro management and full delegation. Instead the asset allocation can be developed by first establishing a reference portfolio – a liquid, passively implementable portfolio which maps out a scheme’s long-term risk and return characteristics.
This then allows for a more dynamic and granular implemented portfolio to be assessed against this more straightforward but slower-moving comparator over longer-term investing periods.
This balances the complex reality of the investment universe against the simple reality of choice of investment approaches available, and offers a helpful way to reset the asset-owner and asset-manager dynamic.
None of this means that the job is done.
This is not a one-off reset of the 60/40 portfolio – governance can be enhanced, but can never stop.
The approach described aims to bring realignment and accountability to a pension scheme’s true long-term investment potential.
The focus can move back from the trees to the woods; to investment markets as they will be in five, 10, 20 years – a different balance of geographies; ownerships across capital structures and not simply within asset class buckets; active ownership of assets and not funds. By reflecting the changing nature of the world’s financing basket to maximise the opportunities available, portfolios will be better placed to work towards that end goal of being able to pay that last pensioner liability in 40 or 50 years’ time.
Leandros Kalisperas is head of pension solutions for Aberdeen Standard Investments
