institutional investors | Pension360

Institutional Investors Push Oil Giants to Disclose Climate Change Risks

A coalition of 150 investors – including pension funds from around the world – are calling on oil giants BP and Shell to provide greater transparency regarding the risks that climate change poses to their business models.

Institutional Investors Keeping Close Eye on Oil As Prices Continue To Slide

The price of oil dropped below $45 per barrel on Tuesday, and many Americans are undoubtedly enjoying the price drop – at least when they are filling up at the pump.

But the drop is causing “a lot of concern” for institutional investors, according to a Pensions & Investment report.

From Pensions & Investments:

The impact of low oil prices is mixed, but already are being acknowledged and felt by institutional investors.

“There is a lot of concern from clients,” said Tapan Datta, London-based head of asset allocation at Aon Hewitt. He said discussions are taking place among investors, looking at how to “protect themselves if things go seriously wrong. There is no doubt that it should be considered.”

One of the main concerns for pension funds would be the link between falling oil prices and lower inflation.

Pension fund liabilities are where the oil price drop could “bite,” said Mr. Datta, with falling inflation leading to even lower bond yields, and a subsequent rise in liabilities.

“Everybody is worried that the price (of oil) doesn’t seem to have a floor at the moment,” added Alastair Gunn, U.K. equities portfolio manager at Jupiter Fund Management PLC in London. “It is making equity holders quite jittery about dividends, and is making bondholders jittery about the risk of defaults.”

Pension fund executives are certainly paying attention. Ricardo Duran, spokesman for the $189.7 billion California State Teachers’ Retirement System, West Sacramento, said the bulk of the fund’s oil holdings are in the global equity and fixed-income allocations. As of Dec. 31, the $107.8 billion global equity portfolio invested about 5.9% in the oil and gas sector, covering areas such as exploration and production, refining and marketing, and storage and transportation, he said. That equates to about $7 billion.

Just less than 8%, or about $1 billion, of the $13.4 billion fixed-income credit portfolio is in oil, invested mostly in the independent and integrated energy sectors, in midstream holdings, oil field services and refining, he said.

“(The falling oil price) has exerted a downward pressure on the portfolio,” the spokesman added in an e-mailed comment.

CalSTRS executives are “closely monitoring the situation before determining what, if any, moves to make,” said the pension fund spokesman. “CalSTRS is a long-term investor and, while the drop in oil prices has been a cause for some concern, we have to balance that against growth opportunities the situation may create in other sectors of the economy in which we’re also invested.”

Several pension executives told P&I that, although they are watching oil carefully, they still retain the mindset of long-term investors.

Photo by ezioman via Flickr CC License

Shareholder Engagement Produces Few Results, Says Activist Investor

Shelley Alpern, Director of Social Research & Advocacy at Clean Yield Asset Management, penned a piece on Monday weighing in on fossil fuel advocacy among institutional investors.

Most institutional investors have declined calls to divest from fossil fuel assets, citing their fiduciary duties as a major reason.

Instead, many have opted to use their clout as major shareholders to actively engage with companies.

But Alpern is skeptical of this tactic.

Alpern writes:

Institutional investors and asset owners owe it to themselves to understand when engagement works and when it doesn’t.

On the whole, shareholder engagement has an admirable track record. Its practitioners can take credit for many achievements: increased disclosure of corporate political spending; reduced waste, pollution and water usage; greening supply chains; broad adoption of inclusive nondiscrimination policies; and greater diversity on corporate boards. Not to mention the anti-apartheid campaigns of the 1980s.

Engagement succeeds when we can make a persuasive case that change will enhance shareholder value, reduce business or reputation risk, or both. Ethical imperatives rarely carry the day on their own.

Engagement will fail when a company with flawed policies or practices perceives them to be unalterable. As engagement with tobacco companies demonstrated, it also will not work when the goal is to change the core business model of a company.

She then looks at the track record of shareholder engagement with fossil fuel companies:

It’s been 23 years since the first climate change proposal was filed at a fossil fuel company. Using conservative estimates based on records kept by the Interfaith Center on Corporate Responsibility, at least 150 such proposals have been filed at fossil fuel companies since, and at least 650 climate proposals and dialogues on climate change have taken place at non-fossil fuel companies.

Space limitations preclude a detailed inquiry into these engagements, so let’s take a snapshot look at the most recent efforts and where things stand as of right now.

In late 2013, 77 institutional investors with more than $3 trillion in assets called on 45 companies to assess the potential for operational assets to lose value if carbon regulations become stricter and if competition from renewables takes market share.

Most coal and electric power companies didn’t provide the written responses requested. Most oil and gas companies did respond, but none acknowledged the existential threat to their activities or the need to scale them back. As former SEC Commissioner Bevis Longstreth observed, ExxonMobil not only denied that any of its reserves could become stranded, but also stated that it is “confident that future reserves, which it intends to discover and develop in quantities at least equal to current proved reserves, will also be unrestricted by government action.” With this report, Longstreth concluded, “ExxonMobil has thrown down the gauntlet after slapping it hard across the collective face of humanity.”

Two successive waves of “carbon asset risk” shareholder proposals followed this initiative, but have done nothing to budge the denialist positions held by their targets.

Read the entire piece here.

Photo by penagate via Flickr CC

Chart: Negotiating Hedge Fund Expenses

A recent survey asked investors: have you negotiated a cap on direct expenses with your hedge funds managers? This chart, above, displays the results.

The 2013 version of the same survey found that fees were the biggest obstacle for institutional investors looking to put money in hedge funds:

1st chart credit: Ernst & Young 2014 survey

2nd chart credit: Ernst & Young 2013 survey

Chart: Institutional Investors’ Planned Allocation To Hedge Funds Over the Next Three Years

An Ernst & Young survey asked institutional investors how they were planning to shift their hedge fund allocations over the next three years.

The 2014 responses can be seen above, paired with responses to the same question from 2012 and 2013.

Chart credit: Ernst & Young 2014 survey

Research Firm: Institutional Investors Still Hungry for Hedge Funds

Research from eVestment indicates institutional investors are still hungry for hedge funds even after a year that saw low returns for the investment vehicles. The research estimates that investors will put at least $90 billion in hedge funds in 2015.

From Money News:

Wealthy investors are poised to put at least $90 billion into hedge funds next year, even after returns have largely been lackluster this year, research firm eVestment said.

Fresh demand from pension funds, endowments, and insurers looking for alternatives to traditional stock and bond holdings will fuel next year’s flows, the researchers wrote in a report.

“Will institutional investors maintain their investments and continue to allocate more to hedge funds in 2015 … The short answer is yes,” they wrote, adding “We expect asset flows into hedge funds of at least between $90 billion and $110 billion in 2015.” Hedge funds manage roughly $3 trillion in assets.

The appetite for hedge funds remains strong even after the $300 billion California Public Employees’ Retirement System, the largest U.S. pension fund, said in September it was pulling out of hedge funds because they are too costly and complicated.

Hedge funds took in roughly $112 billion in new money this year even though returns have been paltry, with the average fund returning roughly 4 percent this year through November. As hedge funds posted low single digit returns, the stock market raced to a series of fresh highs and the Standard & Poor’s 500 index gained 12.8 percent since January. Last year, investors added $62 billion in new money to hedge funds.

The research suggested that investments in stock-oriented hedge funds could slow down, but investments in multi-strategy hedge funds will likely rise in 2015.

Photo by 401kcalculator.org

Pension Funds Find Farmland To Be Fertile Investment

Institutional investors are donning their straw hats, opening their tool sheds and getting to work in the crop fields.

Investors are drawn to farmland by strong returns and its weak correlation with other assets.

From The Economist:

Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards. Investors who are keen on even bigger risks and rewards flock to places such as Brazil, Ukraine and Zambia, where farming techniques are often still underdeveloped and potential productivity gains immense.

Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with low volatility to boot. Those going against the grain warn of a land-price bubble. Believers argue that increasing demand and shrinking supply—as well as urbanisation, poor soil management and pressure on water systems that are threats to farmland—mean the investment case is on solid ground.

It is not just the asset appreciation and yields that attract outside capital, says Bruce Sherrick of the University of Illinois at Urbana-Champaign: as important is the diversification to portfolios that farmland offers. It is uncorrelated with paper assets such as stocks and bonds, has proven relatively resistant to inflation, and is less sensitive to economic shocks (people continue to eat even during downturns) and to interest-rate hikes. Moreover, in the aftermath of the financial crisis investors are reassured by assets they can touch and sniff.

Read the full report from the Economist here.

Institutional Investors Bullish on Stocks, Alternatives in 2015

Institutional investors around the globe believe equities will be the best-performing asset class in 2015, according to a survey released Monday.

Investors are also bullish on alternatives, but not as thrilled when it comes to bonds, according to the survey.

The results summarized by Natixis Global Asset Management:

Forty-six percent of institutional investors surveyed say stocks will be the strongest asset category next year, with U.S. equities standing above those from other regions. Another 28 percent identify alternative assets as top performers, with private equity leading the way in that category. Only 13% predict bonds will be best, followed by real estate (7%), energy (3%) and cash (2%).

Natixis solicited the market outlook opinions of 642 investors at institutions that manage a collective $31 trillion. The survey found:

– Realistic expectations of returns: On average, institutions believe they can realistically earn yearly returns of 6.9 percent after inflation. In separate surveys by Natixis earlier this year, financial advisors globally said their clients could anticipate earning 5.6 percent after inflation1 and individuals said they had to earn returns of 9 percent after inflation to meet their needs.2

– Geopolitics leads potential threats: The top four potential threats to investment performance in the next year are geopolitical events (named by 17% of institutional investors), European economic problems (13%), slower growth in China (12%) and rising interest rates (11%).

– Focus on non-correlated assets: Just under three-quarters of respondents (73%) say they will maintain or increase allocations to illiquid investments, and 87% say they will maintain or increase allocations to real estate. Nearly half (49%) believe it is essential for institutions to invest in alternatives in order to outperform the broad markets.

– Words of advice for retail investors: Among the top investment guidance institutions have for individuals in the next 12 months: avoid emotional decisions.

[…]

“Institutional investors have an enormous fiduciary responsibility to fund current goals and meet future obligations,” said John Hailer, president and chief executive officer for Natixis Global Asset Management in the Americas and Asia. “The current market environment makes it difficult for institutions to earn the returns that are necessary to fulfill both short-term and future responsibilities. Building a durable portfolio with the proper risk management strategies can help investors strike a balance between pursuing long-term growth and minimizing losses from volatility.”

[…]

“Institutional investors have an unusually good perspective about markets and long-term prospects,” Hailer said. “Like ordinary investors, institutions have short-term worries. They also feel the pressure to take care of current needs, no matter what the markets are doing. Because of their longer-term time horizon, they offer valuable perspective.”

The full results of the survey can be read here.

Report: Institutional Investors Plan to Increase Private Equity, Decrease Hedge Fund Allocations in 2015

A Coller Capital report released Monday showed two strong trends in institutional investor sentiment.

Forty percent of investors are planning on increasing their allocations to private equity in 2015. Meanwhile, 33 percent of those same investors said the see themselves decreasing their hedge fund portfolios.

Private Equity Likely to Target 401(k)s As Next Big Capital Source

According to a survey released Monday, nearly 90 percent of institutional investors believe that defined-contribution (DC) plans are firmly in the cross-hairs of private equity firms.

Reported by Investments and Pensions Europe:

Coller Capital’s latest quarterly Global Private Equity Barometer suggests the world’s limited partner (LP) community is almost unanimous in its expectation that defined contribution (DC) pension schemes will become a source of private equity capital over the next five years.

The findings, based on the private equity secondaries specialist’s survey of 114 investors worldwide, also show growing enthusiasm for private equity in general, and buy-and-build and private credit in particular – despite some concern over what the exit environment for private assets might look like in 3-5 years’ time.

Almost nine out of 10 investors see DC providing private equity capital within five years, with 27% of European LPs believing DC schemes will provide “significant” capital to the asset class.

Stephen Ziff, a partner at Coller Capital, said: “The backdrop to the finding about DC assets going into private equity is one of more capital in general moving into alternatives, and private equity in particular.

“But in addition there has been a shift in the pensions landscape over the past several years, and GPs are certainly looking for new sources of capital. The industry is slowly starting to get to grips with the challenges, to varying degrees – particularly features of DC investments like liquidity and daily pricing.”

The survey interviewed a representative sample of institutional investors, including pension funds and endowments, based across the globe.

Photo by TaxCredits.net

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712