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Panel Detail:
Monday, April 28, 2008
2:30 PM - 3:45 PM
Ahead of the Curve: Where Institutional Investors Are Headed in 2008 and Beyond
Speakers:
Christopher Ailman,
Chief Investment Officer, California State Teachers' Retirement System (CalSTRS)
Joseph Dear,
Executive Director, Washington State Investment Board
Robert Kleine,
Treasurer, State of Michigan
William Lee,
Chief Investment Officer and Vice President, Pensions and Foundation Investments, Kaiser Permanente
Moderator:
Scott Minerd, CEO and Chief Investment Officer, Guggenheim Partners Asset Management Inc.
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Joseph Dear of the Washington State Investment Board (left) compares investment strategies with Robert Kleine, Michigan's state treasurer (right).
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Globally, institutional investors have more than $53 trillion in assets under management. In the United States, these investors (pension funds, investment companies, insurance companies, banks, endowments and foundations) own nearly 60 percent of the public equity market, giving them enormous influence. In this panel, decision-makers at leading institutional investors discussed some of the most important issues of their industry.
Scott Minerd of Guggenheim Partners Asset Management, the moderator of the panel, launched the discussion by referring to the topic du jour, the subprime-mortgage-driven credit crunch. Participants by and large agreed that the crisis is not over yet. Robert Kleine of the State of Michigan specifically remarked that we are not near the end. Joseph Dear of the Washington State Investment Board added that the ripple effects of the crisis had yet to hit regional banks. William Lee of Kaiser Permanente commented that going forward, there should be a lot of opportunities due to large volatility.
Christopher Ailman of the California State Teachers' Retirement System (CalSTRS) noted that depending on their positions, market participants tend to have diverging views on the state of the crisis: Investors specializing in public markets are more optimistic, while those focusing on private equity and real estate are less so.
The ensuing discussion centered on increasing complexity in the investment world and its effects on strategies and governance. Minerd commented that intersections among asset classes are growing, with distinctions blurring. Ailman argued that this amounts to increased pressure across the board, for trustees, investment managers and analysts. As a result of the complexity, investors need to be more nimble in defining and reacting to opportunities. This especially has implications for pension plan boards, which try to manage the portfolios themselves. "Looking forward, this is no longer a part-time job," quipped Ailman.
Dear remarked that complexity is a huge issue in terms of the implications for governance structures: "It's about trust; it's about sharing power." Governance models developed in the 1970s and 1980s are no longer adequate. More complexity also translates to an urgent need for installing sound risk-management systems, and there are no shortcuts or recipes for this.
The issue of alternatives as an asset class garnered considerable attention from the panelists. Dear noted that the allocation the plan can provide to alternatives depends on the liquidity requirements; if the manager can accommodate restricted liquidity, alternatives promise high returns otherwise not achievable. "Unconstrained investments have better prospects, but the trick is to build a risk-management program," he remarked. Dear's plan has been investing up to 25 percent of its total portfolio in private equity since 1981, while Kleine's plan invests up to 15 percent in private equity. However, the plans don't invest in hedge funds generally due to limited transparence. Minerd presented the findings of academic studies showing that the average mutual fund underperforms the market, and the average hedge fund underperforms mutual funds after fees.
The moderator challenged the panel with the following intriguing question: "Do you believe in alpha?" Lee confirmed that he believes in alpha but added that in the future, we need to emphasize beta at least as much as alpha. Kleine was also an alpha-believer, but he argued that the investment climate from returns to taxes would be less favorable in the future compared with the past decade or so. Dear remarked that institutional investors need alpha and need the managers who will produce it. Ailman noted that getting alpha was becoming more expensive, coupled with a difficulty of making it consistent.
Another important topic for state pension funds might be potential obligations for investing within their home state, not least due to political concerns. Dear was adamant that the pension plan's fiduciary duty is only to its participants: "There is this single criterion, and we're not going to make exceptions based on zip codes." He acknowledged that political pressure naturally comes with the job.
Ailman noted that the job does involve a lot of pressure and pointed out some potential inefficiencies associated with political investing. For instance, investing in and operating a toll road in the home state might actually result in the pension fund working against the welfare of its constituents by keeping tolls high. He emphasized that pension plans cannot have multiple goals.
Kleine, on the other hand, acknowledged that his state is just about to launch a $300 million fund to be invested in local firms, which is just a drop in the bucket considering total investment size of $30 billion. According to Kleine, if done right, it can work out for both plan constituents and the local economy.
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