Chart: Pension Funds on Long-Term Investing

IPE long term investor

Investments & Pensions Europe released the results of a survey recently that asked pension funds to answer questions about long-term investing: do pension funds consider themselves long term investors? What makes long-term investing difficult? What are the advantages of taking a long view?

The survey results are interesting in light of a recent paper that examined whether pension funds were really acting as long-term investors.

The results can be seen in the graphics above and below, and can be read here.


IPE long term invest

Norway Pushes Pensions to Up Investments in Domestic Private Equity


A report released by the Norwegian government encourages the country’s pension funds to increase their investments in domestic private equity; the country is looking to boost the financing of its more innovative companies.

According to the report, interest in domestic private equity has fallen rapidly in the last eight years.

From Investments and Pensions Europe:

Norwegian pension providers should increase their exposure to domestic private equity to improve the country’s growth prospects, an in-depth government report has suggested.

According to the productivity commission, the state should also recognise that regulation has acted as a barrier to competition in the provision of public sector pensions, with the report pointing to the departure of DNB and Storebrand, leaving only KLP to bid for local authority provision.

The commission’s initial, 542-page report will now be examined by the government before a second paper puts forward concrete reform proposals on how the Norwegian economy should adapt as the role played by the oil industry declines.

It noted that there had been a marked fall in interest from domestic private equity funds since 2007, when the industry agreed to 160 first commitments.

The figure fell to just 15 a year by the end of 2013.


It concluded that there was room for long-term investors, including pension providers, to increase their role in funding start-ups and small and medium enterprises (SMEs).

Read IPE’s interview with the chief executive of Norges Bank Investment Management here.

Study: Despite Improvements, Pension Fund Governance Cause for “Concern”

board room chair

A new paper by Keith Ambachtsheer and John McLaughlin dives into pension fund governance and concludes that, although governance has improved, there are still causes for “concern”.


Pension funds and other major investors are failing to act sufficiently to promote good governance and long-term investing, according to a new study.


They found there had been some improvement in governance of pension funds and other major investment institutions, but many “major concerns” still remain.

Ambachtsheer and McLaughlin updated previous governance surveys to add force to the initiative, quizzing 81 major pension funds with total assets in excess of $5 trillion.

“Despite evidence that board effectiveness is marginally improving, our survey-based study conducted in 2014 finds that much work still needs to be done,” the authors wrote.

Among their governance concerns, Ambachtsheer and McLaughlin listed “flawed” board selection processes, unclear board oversight functions, and uncompetitive pay packages hampering recruitment and retention of talent.

“It will require a concerted, ongoing joint effort by pension plan stakeholders, pension organization boards, regulators, and legislators to change the current situation,” the pair said.

The paper, which also covers long-term investing efforts, can be read here.

Survey: Institutional Investors Often Driven Towards Short-Term Thinking


Previous surveys have shown that pension funds almost universally consider themselves long-term investors. But their investment decisions, by their own admittance, can often reflect short-term thinking.

A new survey sheds some light on the factors and pressures that cause pension funds to break away from long-term thinking.

Summarized by Chief Investment Officer:

Accounting demands, valuation models, and modern portfolio theory are driving institutional investors towards short-termism, Hermes Investment Management has claimed.

After conducting a survey of more than 100 European investors, the fund manager reported that 44% said external pressures were forcing them away from views in line with their long-term liabilities.

“The short-term factors driving the management of pension schemes require detailed attention,” said Saker Nusseibeh, CEO of Hermes Investment Management. “Schemes need to have the freedom to act and focus on longer term considerations to best serve their end beneficiaries, savers.”

Hermes is owned by the UK’s largest pension, the BT Pension Scheme.

One of the major headaches for investors, the survey found, was quarterly results, with 44% demanding longer-term reporting. Pension accounting measures and triennial valuations were equally admonished by respondents.

This short-term thinking is also taking investors’ eyes away from their roles as good shareholders. Some 37% told the survey they thought focus on short-term investment performance acted to disconnect them from “their responsibilities as owners of actual companies”.

Additional questions were asked about innovation in the asset management industry. Some 42% said they wanted greater innovation around outcome-focussed investing, while 32% wanted better ways to reduce volatility.

More than half—56%—said they wanted innovation around the disclosure of costs.

The survey was conducted with 100 institutional investors from across Europe.


Photo by Santiago Medem via Flickr CC

Pension Funds Push G20 Leaders to Regulate and Reform With Long-Term Investing in Mind

G20 2014 logo

Pension funds and other investors participating in the Fiduciary Investors Symposium at Harvard University have written a letter to Australian Prime Minister Tony Abbott encouraging him and other G20 leaders to implement regulations and reforms that encourage long-term investing.

[The letter can be read at the bottom of this post.]

Australia is hosting the 2014 G20 summit.

From the letter:

There was a request to alert you to this support from the industry and to request action from G20 leaders on the following:

1. That we acknowledge the OECD’s definition of long-term capital in terms of being patient, engaged and productive.

2. That investor voices can play an important role in the discussion of those factors that are fundamental to the development of a sustainable financial system that delivers benefits to the economy, our societies and the planet, now and into the future.

3. That asset owners, including pension funds, sovereign funds and endowments have an interest to ensure that, in order to provide strong financial returns, and effective stewardship of assets as well as value creation, all the stakeholders in funds management need to be well informed about and active in pursuing a long term investment horizon. This requires a commitment to stronger direct engagement with companies and changes in reporting cycles and greater transparency.

4. That regulation can be enabling of long-term investment and we want to ensure that regulation does not inhibit long-term investment. We therefore encourage a deeper level of engagement between asset owners and investment managers with policy makers that relate to the evolving global financial, economic and social processes as they become more integrated and more complex and help design a regulatory framework that helps and does not hinder long-term investment.

Read the entire letter here, or below.


[iframe src=”<p  style=” margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block;”>   <a title=”View G20 Letter on Scribd” href=””  style=”text-decoration: underline;” >G20 Letter</a></p><iframe class=”scribd_iframe_embed” src=”” data-auto-height=”false” data-aspect-ratio=”undefined” scrolling=”no” id=”doc_81507″ width=”100%” height=”600″ frameborder=”0″></iframe>”]


Photo by

Lowenstein: Do Pension Fund Make Investing Too Complex?


Former New York Times financial writer Roger Lowenstein wonders in his new Fortune column whether pension investments have become too complex.

Lowenstein’s thesis:

Pricey consultants have convinced many pension funds to pile into private equity, real estate and hedge funds, which don’t necessarily promise higher returns or long-term investing.


[Pension funds] have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles. They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.


It’s true that the stock market doesn’t always go up. But a long-term investor shouldn’t be wary of volatility. Over the long term, American stocks do go up. And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.

Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents. The Iowa system has trailed the Wilshire stock index over 10 years—also over five years, three years, and one year. Over time, that translates to higher expenses for employees or for Iowa taxpayers. And Iowa is typical of public funds generally.


Many hedge funds trumpet their ability to dampen volatility. Pension funds should not be in them. From 2009 to 2013, a weighted index of hedge funds earned 8% a year, according to Mark Williams of Boston University. The return on the S&P 500 was more than twice as much, and a blended 60/40 S&P and bond fund earned 14%. Granted, a small minority of hedge funds consistently beat the index. But most public pensions will not be in such superlative funds.

Lowenstein on private equity:

Private equity remains the rage. However, private equity is hugely problematic. Those confidential fees are often excessive—with firms exacting multiple layers of fees on the same investment.

Moreover, there is no reliable gauge of returns. Private equity firms report “internal rates of return.” These do not take into account money that investors commit and yet is not invested. “The returns are misleading,” says Frederick Rowe, vice chairman of the Employee Retirement System of Texas. “The professionals I talk to consider the use of IRRs deceptive. What they want to know is, ‘How much did I commit and how much did I get back?’”

Since no public market for private equity stakes exists, annual performance is simply an estimate. Not surprisingly, estimates are not as volatile as stock market prices. But the underlying assets are equivalent. A cable system or a supermarket chain does not become more volatile by virtue of its form of ownership.

The fact that reported private equity results are less volatile pleases fund managers. But the juice in private equity comes from its enormous leverage. Pension managers would be more honest if they simply borrowed money and bet on the S&P—and they would avoid the fees. And if high leverage is inappropriate for a public fund, it is no less inappropriate just because KKR is doing it.

Lowenstein ends the column with a call for pension funds to renew their focus on “long-term goals”:

With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market. The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.

Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.

The focus on the short and medium term squanders what a pension fund’s true advantage is. You may not have thought that public funds had an advantage, but they wield more than $3 trillion and have the freedom to invest for the very long term.

Better than chase the latest “alternative,” pensions could become meaningful stewards of corporate governance—active monitors of America’s public companies. A few fund managers, including Scott Stringer, the New York City comptroller, who oversees five big funds, are moving in this direction, seeking board roles for their funds. More should do so, but that will require an ongoing commitment. It will require, in other words, that pension funds stop acting like turnstile traders and fad followers, and that they start behaving like investors.

Read the entire column here.


Photo by Victoria Pickering via Flickr CC License

An Optimist’s View of Long-Termism In Institutional Investing


Investments & Pensions Europe released a survey today indicating that three of every four pension funds consider themselves long term investors. But they disagreed on the specifics of long-termism.

In light of the survey, here’s an article by Theresa Whitmarsh, Executive Director of the Washington State Investment Board, discussing how pension funds can move away from short-termism and improve the dialogue surrounding true long-term investing.

The article was published in the Fall 2014 issue of the Rotman International Journal of Pension Management.

Whitmarsh writes:

While solutions to short-termism proposed for institutional investors vary, they coalesce around three themes: first, disintermediation through direct ownership of private assets; second, concentrated holdings of publicly traded securities with commensurate influence over corporate behavior; and, third, collaboration with other investors to influence market behavior. All three models are being tested and successfully implemented, but not at scale.

There are several sound reasons for this. Disintermediation is not always practical for a globally diversified portfolio. Skilled intermediaries who possess asset class, style, sector, and geography expertise will always be in demand (and, unfortunately, even unskilled ones will remain in demand). And holding a concentrated portfolio of public companies runs counter to what we know about active investing: it is very difficult for an active investor to outperform broad market indexes, and index investing remains an efficient and cost-effective way for institutional investors to put large amounts of money to work. Finally, as mentioned earlier, market and governance reform has fallen short of our goals as investors, despite strong governance-focused collaborations. Intermediaries outnumber us, outspend us on lobbying, and are more financially motivated than us to maintain the short-termist status quo.

So while the benefits of long-termism can be many – harvesting an illiquidity risk premium, providing ballast to the capital markets, and encouraging corporations to invest in innovations that sustain their enterprises and society over time – neither investors nor corporations have a particularly strong record.

However, I am becoming more optimistic that a movement for long-termism is afoot, one that is pulling in corporations and intermediaries and that has the potential to get enough traction to change behavior. This movement comes from deep within the corporate sector and is increasingly supported by important market players. It goes by various names – sustainable capitalism, fiduciary capitalism, inclusive capitalism, conscience capitalism – but no matter the moniker, the goal of all these undertakings is to encourage a brand of capitalism that prices in externalities, broadly benefits society, and ultimately sustains the planet. An initiative co-sponsored by the Canada Pension Plan Investment Board and McKinsey, Focusing Capital on the Long Term,1 involves broad participation from investors, money managers, corporations, and finance academics and will be producing several recommendations on how to take these concepts from idea to practice.

Whitmarsh on the three catalysts that she believes will spur long-term investing:

I see three catalysts for the increasing dialog on the benefits of long-termism – the first two self-serving of the market, though not without benefit to society, and the third essential to our survival as a species.

The first catalyst is the need to restore trust in the capitalist system. Trust was one of the main casualties of the Great Recession, according to Christine Lagarde, Managing Director of the International Monetary Fund, who spoke at the Conference on Inclusive Capitalism in London on May 27, 2014.2 Lagarde noted that in a recent poll conducted by the Edelman Trust Barometer, less than one-fifth of those surveyed said they believe that business or government leaders will tell the truth about important issues. This should be a wake-up call, she told her audience; trust is the lifeblood of the modern business economy. The way to restore trust, according to Lagarde, is to ensure that growth is more inclusive, favoring the many, not just the few. She shared a startling statistic: the richest 85 people in the world hold more wealth than the poorest 3.5 billion.

This leads us to the second catalyst: increasing recognition of the negative effect of rising income inequality, in both developed and emerging markets, on the pace of growth. The most unlikely signal that this issue has gone mainstream came in early August, when Standard & Poor’s (2014) published a report that correlates the rise of income inequality in the United States with dampening GDP growth.

The last catalyst is the threat of carbon-emission-induced climate change. Market economies do not price in externalities well, but carbon emissions have to count as potentially the most costly externality ever encountered. (To my mind, only nuclear weapons production comes close.) Even the most self-serving capitalist wants a world in which to keep making money.

Perhaps, with capitalism in crisis, trust in the finance sector at an all-time low, and growing concerns about what we are doing to our planet, we just may – as a society, and collectively as investors – be willing to act.

We have reason to be optimistic that we will act, according to economist Larry Summers. Speaking at the same event as Lagarde, he noted, “This idea that capitalism is about to fail is one we have seen before, and yet it has been a triumph of the capitalist system that it has proven remarkably resilient; that it has given rise to what might be called self- denying prophecies, prophesies of doom that lead to adjustments that lead to repair.”

The entire piece can be read here.


Photo by Santiago Medem via Flickr CC

Video: CalSTRS CIO Talks Long Term Investing And Handling Market Volatility

[iframe src=”<iframe src=”″ width=”635″ height=”500″ scrolling=”no” frameborder=”0″></iframe>”]


Chris Ailman, CIO of the California State Teacher’s Retirement System, sat down with CNBC last week to talk about handling market volatility, re-balancing the fund’s portfolio and being a long-term investor.

Ailman also talks about why CalSTRS invests in hedge funds and why that won’t be changing any time soon.

Video credit: CNBC