How pension funds are going defensive

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by Greg Bright

The latest bfinance quarterly report on the global trends in mandates from big pension funds, published this week, is possibly the most important for several years. Funds are de-risking but they are doing so in different ways. Australian funds tend to be taking a different course in private markets, for instance.

The report, ‘Manager Intelligence and Market Trends’ says that a rocky third quarter, underpinned by weak economic data and ongoing trade war tensions, saw
the bfinance ‘Risk Aversion Index’ shooting back to January 2019 levels. Further monetary easing in the US and Europe calmed the symptoms of market unrest, but investors remain concerned about the fundamentals.

The report says: “New manager searches from bfinance clients illustrate the ongoing emphasis on diversification, with private markets mandates proving more numerous than equity mandates. In private markets we note a clear shift from debt towards equity, with a decline in new searches for corporate private debt.

“Plenty of active equity managers were caught out in Q3 when the value factor returned to form: global equity managers tracked by bfinance underperformed the MSCI World by 1.2 per cent although relative performance remains strong over one year (+2 per cent) and three years (+2.9 per cent p.a.).

“New mandates for ‘multi asset’ outstrip new mandates for hedge funds. Yet the real picture is more complex: investors are increasingly pursuing “outcome-oriented” manager searches, with a clear focus on the desired objectives but an open mind about strategies that may fit the bill.

“Demand remains strong for investment grade credit. While the US market is outperforming Europe through 2019, Europe has provided a more favourable environment for active managers: 85 per cent of them beat the benchmark in Q3.”

From an Australian and New Zealand perspective, according to the Sydney-based bfinance director, Frithjof van Zyp (better known among Anglo types as ‘Fridge’), says there has been a slowdown in allocations to private debt overseas, but not in Australia. And real estate debt has been “interesting”, he says.

“Corporate and real estate debt searches have picked up in Australia. And there are some Australian-based managers who operate in this space as well. In a recent search we found 12 managers offering real estate debt in Australia… Our client was looking to deploy A$200 million globally and in the end decided on allocating a significant portion to Australian managers given the compelling risk/return opportunity in Australia. Based on our discussions with Australian real estate debt managers, it seems like we are one of the few consultants to have done meaningful research in this space.”

(Chicago-based manager Heitman, which has a specialty real estate private debt capability, opened an office in Australia in 2017, under Beau Titchkosky. David Maki, the head of the firm’s private debt strategies, was in Australia last week to speak at a conference – see separate report this issue.)

Another strategy which bfinance tends to devote more research time to than its competitors – alternative risk premia – was challenged by market conditions in 2018 but has fared better this year.

More recently, bfinance has been doing work on equity risk mitigation strategies, mindful of the general view that equity markets are fully priced. “But we’re not in the game of trying to decide when it [a correction]is going to happen,” he says. “We’re in the position to build portfolios to weather a downturn. There are a lot of solutions we’re looking at.”

Meanwhile, the average size of new mandates around the world has continued to rise, now sitting at US$143 million versus US$110 million in the previous 12 months.

This has been driven by a significant increase in the average size of private market searches, the report says. It is interesting to note, in a related trend, that private market managers have also been raising their fee-tiering thresholds in more recent funds (that is, the size of commitment for the investor to qualify for a discount).

Another trend comparing the 12 months to September 2018 with the period to September 2019 was a dip in global searches, from 36 per cent of total searches to 29 per cent, and a rise in regional searches. Emerging markets searches have risen from 28 per cent to 32 per cent and ‘developed regional equity’, such as US only, Europe, Japan and Australia, have risen from 20 per cent to 29 per cent.

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