Monday, October 27, 2014

Surge in Confidence Among Global Funds?

Digital Journal reports, Pyramis survey reveals surge in confidence among world's largest institutional:
Confidence has returned among institutional investors worldwide, according to a new survey by Pyramis Global Advisors.

Nine in ten (91%) pension plans and other institutional investors believe they can achieve target returns in five years, significantly higher than the 65 percent reported in 2012, according to the 2014 Pyramis Global Institutional Investor Survey, which includes 811 respondents in 22 countries representing more than USD$9 trillion in assets.

"After years of strong equity returns and below average volatility, institutional investors want to keep their winning streak going," said Pam Holding, chief investment officer, Pyramis. "Our global survey shows that while the outlook on volatility varies greatly by region, institutions worldwide largely agree that they can continue to grow their portfolios and improve funded status."

Significant Regional Differences

The Pyramis survey identifies regional differences across such topics as: expectations for market volatility, perspectives on alternatives, investment objectives and investment opportunities.

Market Volatility Expectations

Outside the U.S. and Canada, volatility expectations over the long term are quite low with a decrease in the frequency of boom/bust cycles expected in Asia (91%) and Europe (79%). Only seven percent of U.S. institutions expect volatility to decrease, while 42 percent expect an increase in volatility. This trend continues across North America with only 10 percent of Canadian plans expecting a decrease in volatility, while 60 percent foresee an increase.

While market volatility remains a top concern in Europe and Asia, U.S. institutions are expressing less worry about capital markets than years past. Europe also remains concerned about a low return environment, while Asia is focused on regulatory and accounting changes and Canada is focused on risk management. The top concern for U.S. plans is current funded status (28%), with a majority of pensions intending to improve it.

Perspectives on Alternatives

While the use of alternative investments is still rising rapidly in the rest of the world, use of liquid and illiquid alternatives appears to be slowing among U.S. institutions.

Among respondents planning an allocation increase to illiquid alternatives over the next one to two years, Asia leads the way with 79 percent, followed by Europe (57%) and the U.S. (22%).

When asked which investment approaches are most likely to underperform over the long term, 31 percent of U.S. respondents cite hedge funds as least likely to meet expectations. Risk factor investing is expected to be the biggest disappointment among Canadian, European and Asian plans.

When asked specifically about the fees associated with alternative investments, only 19 percent of U.S. plans surveyed say hedge funds and private equity are worth the fees, as compared to 91 percent in Asia and 72 percent in Europe.

"U.S. plans are currently reevaluating the complexity, risks and fees associated with hedge funds," said Derek Young, vice chairman of Pyramis Global Advisors. "Our survey suggests that U.S. institutions are preparing to move back to a more traditional, back-to-basics portfolio."

Investment Objectives

On average, primary investment objectives among global institutions lean toward growth, but results vary considerably by geography. Asian institutions are overwhelmingly focused on growth, with 64 percent listing capital growth as the primary investment objective. For plans in the U.S., funded status growth is the primary investment objective, but levels differ among public plans (62%) and corporates (37%). Plans in Europe are primarily focused on preservation, while Canadian institutions are equally focused on preserving and growing their funded status.

Investment Opportunities

A global view of the survey results shows plans are seeking investment opportunities over the medium term predominantly in emerging Asia. However, a regional breakdown reveals a geographic tilt. Seventy-one percent of plans in Asia cite emerging Asia as the top medium-term growth prospect. U.S. and Canadian plans favor North America (34%) and emerging Asia (32%). European plans favor North America (33%), emerging Asia (21%) and developed Europe (19%).

For additional materials on the Pyramis survey, go to

About the Survey
Pyramis Global Advisors conducted its survey of institutional investors in the summer of 2014, including 811 investors in 22 countries (191 U.S. corporate pension plans, 71 U.S. government pension plans, 48 non-profits and other U.S. institutions, 90 Canadian pension plans, 283 European and 128 Asian institutions including pensions, insurance companies and financial institutions). Assets under management represented by respondents totaled more than USD$9 trillion. The surveys were executed in association with Asset International, Inc., in North America, and the Financial Times in Europe and Asia. CEOs, COOs, CFOs, and CIOs responded to an online questionnaire or telephone inquiry.

About Pyramis Global Advisors
Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for, and serving the needs of, some of the world's largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of June 30, 2014, assets under management totaled nearly $215 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London, and Hong Kong. Outside of North America, Fidelity Worldwide Investment is the sole distributor of Pyramis' institutional investment products.

About Fidelity Worldwide Investment
Fidelity Worldwide Investment is an asset manager serving retail, wholesale and institutional investors in 25 countries globally outside North America. With USD $290.1 billion assets under management as of June 30, 2014, Fidelity Worldwide Investment is one of the world's largest providers of active investment strategies and retirement solutions. Institutional clients benefit from the breadth of our investment platform, which combines our own product range and through a subadvisory agreement, the capabilities of Pyramis Global Advisors.

Pyramis, Pyramis Global Advisors and the Pyramis Global Advisors A Fidelity Investments Company logo are registered service marks of FMR LLC.
Interestingly, confidence levels varied significantly. Janet McFarland of the Globe and Mail reports, Canadian pension funds most pessimistic about future market upheavals:
Canadian pension funds are the most pessimistic in the world about coming market upheavals, reporting in a new global pension survey they anticipate market bubbles and crashes will become more frequent in the future.

A survey of 811 pension fund managers by Pyramis Global Advisors, the pension asset management division of financial giant Fidelity Investments, shows Canadians are concerned about future market volatility, while fund managers in Europe and Asia strongly believe market volatility will decrease in the long term.

“It really is polar opposite,” said Derek Young, the U.S.-based vice-chairman of Pyramis.

The survey, conducted in June and July, found 60 per cent of Canadian pension fund managers believe that over the long term, “volatility is increasing and market bubbles/crashes will become more frequent,” while 42 per cent in the U.S. agreed with the statement. However, only 4 per cent of pension managers in Europe and 5 per cent in Asia agreed volatility is increasing.

In Asia, by contrast, 91 per cent said they believe volatility is decreasing and market crashes will become less frequent, while 79 per cent in Europe supported that statement. Just 10 per cent in Canada and 7 per cent in the U.S. said they believe volatility is decreasing.

The survey included 90 Canadian pension funds representing about 25 per cent of all pension plan assets in Canada, Pyramis said.

Mr. Young said he believes the findings reflect the broader global focus of Canadian pension funds, saying funds in other regions are often more inward-looking and focus more on their regional markets. They may have responded based on a consideration of their own local economies, while Canadian pension funds may have been assessing the volatility more broadly in all major markets, he said.

“I do believe that Canada has a very unique and global perspective compared to most countries,” Mr. Young said.

Bill Hatanaka, chief executive officer of OPTrust, which manages pension assets for Ontario government workers who are members of the OPSEU union, said the relatively small size of Canada’s markets on a global scale means pension funds are forced to take a global investing approach and are “sensitized” to the potential for a variety of scenarios to create volatility.

“Our resource-based economy and its inherently cyclical nature has helped us to become more comfortable with anticipating volatility from economic cycles and events,” he said.

Leo de Bever, chief executive officer of Alberta Investment Management Corp., which manages $75-billion of pension and other assets for the Alberta government, said he finds the views of European and Asian fund managers surprising, because “it seems reasonable to assume – as the Canadians did – that historically low volatility could not last.”

“We had not seen a correction in a while, so it was bound to happen some time,” Mr. de Bever said.

The fact equity markets have been so volatile this fall suggests the Canadian respondents may have had an accurate view in June about the likelihood of future boom and bust cycles, Mr. Young said.

“The Canadians were definitely positioned the appropriate way in terms of their thought processes, and certainly that expectation matched up with reality,” he said.

The survey also found that fund managers around the world are more optimistic about the chances of meeting investment return goals over the next five years compared with two years ago when the survey was last conducted.

In 2014, 91 per cent of fund managers globally said they are comfortable they will achieve their annualized returns over the next five years, an increase from 65 per cent. In Canada, 96 per cent believe they can meet their goals, up from 60 per cent in 2012.

Although the survey was conducted before equity markets declined sharply this fall, Mr. Young said he believes the greater confidence is still likely prevailing because “these are long-term investors and we are asking about five-year views.”

Julie Cays, chief investment officer at the Colleges of Applied Arts and Technology (CAAT) Pension Plan in Ontario, said many pension plans have lowered their return assumptions in recent years because interest rates remain low, which helps build confidence the targets can be met.

She said a major reason for concern about future volatility is the huge amount of liquidity the U.S. Federal Reserve has provided in recent years to stimulate the U.S. economy, which she said is an experiment that’s never been tried on such a scale before.

“We don’t really know what the effect of all this liquidity and all these low rates is really going to be over the long term, and I think people are nervous about that,” Ms. Cays said.

Mr. de Bever sees reasons for optimism about returns in future years, saying while many assets are now fully valued, companies are still finding productivity gains and maintaining strong profit margins.

“That’s likely to be true longer term, although one can make a case that the easy gains have been made for now,” he said.
On Friday afternoon, I had a conference call with Pam Holding, chief investment officer at Pyramis, and we discussed these results. I thank Charles Keller for setting this call up.

A few things struck me about the survey. First, as discussed above, there is a significant divergence in views on concerns of future market volatility, with Canadian plans being the most pessimistic (click on image above). Derek Young of Pyramis is right, Canadian funds are more global in their investments which provides them with a unique global perspective on markets.

Some of the largest Canadian pensions funds, like the Caisse, have been publicly warning of global headwinds, and others have privately expressed similar concerns to me. And Julie Cayes is right, the unprecedented liquidity the Fed has provided to stimulate the U.S. economy (and shore up global banks' balance sheets) is an experiment that has never been tried on such a scale before. It could turn out ugly, especially if deflation creeps into the U.S. economy and the market loses faith in the  Fed.

I've been warning my readers for the longest time that deflation is coming and those that are ill-prepared will suffer grave consequences. The Canadian funds are right to be worried, which is why they'll be better prepared when the next big downturn hits global markets (some more than others).

This brings me to the findings of the survey on alternatives. Interestingly, the exuberance on alternatives among U.S. pension funds has simmered down a lot. I think a lot of large U.S. pension funds are asking some very tough questions on alternative investments, with the first one being: "Where's the beef?".

All those huge fees enriching overpaid hedge fund and private equity "gurus" that have become large, lazy, glorified asset gatherers focusing more on marketing to collect that all important 2% management fee no matter how lousy their long-term and short-term performance is (when managing billions, management fees should be scrapped!!).

It's a travesty which is why I'm not surprised CalPERS dropped a hedge fund bomb last month and got out of hedge funds altogether. As this survey shows, other large institutions are beginning to understand the hedge fund myth, openly questioning whether these investments are worth the fees. Of course, assets keep plowing into them despite their lousy performance.

To be fair, I know there are many excellent hedge funds that are worth the fees but it's becoming increasingly harder to identify them. The reality is U.S. public pension funds never took their hedge fund investments as seriously as some of the large Canadian funds (Ontario Teachers, Caisse, etc). They followed the advice of their useless investment consultants who shoved them in funds of funds instead of hiring a dedicated team to oversee these investments (I used to invest in hedge funds, it's not an easy job! Just ask Ron Mock who ran one of the best funds of funds in the world and still suffered harsh hedge fund lessons).

I recently learned that CalPERS is shifting out of hedge funds to invest more in real estate:
The nation's largest public pension is bullish on real estate. The California Public Employees Retirement System plans to increase its $26 billion of commercial real estate investment by $7 billion, or 27%, according to The Wall Street Journal. The move follows the fund's decision to liquidate its $4 billion invested in hedge funds and to stop putting money into hedge funds.

But this time around Calpers will be investing in safer real estate—fully leased office towers and apartments in big cities. It is also investing almost exclusively through real estate funds that manage separate accounts created for Calpers, which offers more control. In the past, Calpers had invested in speculative real estate like shopping malls.
I'm glad CalPERS is investing in safer core real estate as opposed to leveraged opportunistic real estate but this shift in illiquid alternatives isn't without significant risk. There are too many pension funds taking on too much illiquidity risk and this can come back to haunt them, especially in a deflationary environment (not to mention prices are insane right now, making it that much tougher finding deals because everyone is plowing into real estate).

I will end by thanking Pam Holding and Charles Keller at Pyramis for discussing the results of their 2014 global survey. It should be noted this survey was conducted over the summer before the Fall selloff but it still contains very useful and interesting information.

I also wanted to bring to your attention that Pam's team at Pyramis has developed low-volatility products for institutional investors who are not quite sure about how to properly de-risk their plan or just want less beta in their portfolio. I urge you to contact Pyramis Global Advisors if you have questions regarding these products (In Canada, contact Chris Pepper at

The other subject I broached with  Pam is how the governance at the large Canadian public pension funds explains why they make most of their decisions internally. Public pension fund managers in Canada are better compensated than their global counterparts and they are supervised by independent investment boards that operate at arms-length from the government.

Finally, Anthony Scaramucci, founder and co-managing partner of SkyBridge Capital, recently sat down with Steve Forbes to talk about his vision for hedge funds, the activist investing boom and why he got fired — and rehired — at Goldman Sachs. A video and transcript of their conversation is available here. Take the time to listen to this interview.

Mr. Scaramucci sure knows how to talk up hedge funds, which isn't surprising given it's his bread and butter, but I would take some of what he says with a grain of salt. Also, the S&P was down 37% in 2008, not 62% as he states, but I'll give him a break there. His claim that CalPERS got out of hedge funds "at the bottom" might turn out to be true but he totally misses the point as to why they got out.

Below, an older CNN interview where Scaramucci says despite the negative press on hedge funds, he can pick winners. I wish him and other funds of funds in that game the best of luck. If my prediction is right, another wave of destruction will hit funds of funds hard.

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