Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Larry Fink weighs into global pensions questions
(Pictured: Larry Fink)
Pension funds need to address the problem of longevity risk and increase their allocations to growth assets as well as an increasing range of alternatives, according to Larry Fink, the founder and chief executive of BlackRock, the world’s largest fund manager.
Fink spoke last week at the UK National Association of Pension Fund Investment Conference, in Edinburgh. The speech was widely reported in the US, as well as the UK, because of Fink’s influential role with the Obama Administration.
BlackRock’s Aladdin risk system was used by the US Government, as well as some of the troubled banks, during the bailouts of 2008. Fink has subsequently campaigned for better incentives for individuals to save, which was heeded in January this year with a new initiative from President Obama of a government-backed retirement account, called My Retirement Account, for people without access to a workplace pension. The account is capped at US$15,000 and can only invest in government bonds.
Fink told the UK conference that: “While the fact that we are all living longer is considered an unalloyed positive [I am] concerned we have not fully adjusted to the effects on our economy and on our personal finances. We need to grasp the effects of longer lives, on the markets, on employment and on the need to save for retirement,” according to the Wall Street Journal.
Longevity was at the top of the list of questions he would be asking himself if he was the CIO of a pension fund, he said, and what impact this was likely to have on the fund’s liabilities.
Asset International reported that Fink also advocated for the UK and the US to move to a compulsory saving model, as adopted in Australia, to help increase savings.
“He also berated the ‘far too many’ defined benefit schemes he saw with “20-30 per cent in cash and 10-20 per cent in short bonds-‘how will that help individuals? They won’t earn enough’.”
Fink also stressed the need for CIOs to ask how their assets would perform relative to liabilities under different scenarios, and whether they were getting good value in relation to their assets.
Looking at asset management more broadly, he claimed the way that pension funds would consider emerging markets in future would fundamentally change.
“[Emerging markets have] good examples, and some real garbage,” he said. “The future of investing in emerging markets will change: I believe we’ll see much more granularity and we’ll stop talking about emerging markets as an asset class.”
Fink went on to warn that pension fund managers would need to take a much bolder approach and have a greater willingness to look at alternatives, hedge funds, and more esoteric bonds, Asset International reported.
