Daniels said a huge lending gap had arisen as a result of the financial crisis and tighter regulation of the banks and that pension funds should seek out companies which needed investment as a long term investment.
He said that when investing in private equity, it was important to check that a fund was not just a way of charging high fees. His team also always focused on the fund’s long term target, searching for equity investment on a global basis, rather than equities that beat a specific index. For emerging market exposure, it was not always necessary to buy emerging market funds, as there were plenty of UK equities with emerging market exposure.
Arno Kitts of Blackrock said pension funds should adopt a more flexible approach to asset allocation if they are to succeed in an era of a 3 per cent equity risk premium and low predictability. Fund managers should beware bond yield asymmetry, demand more from traditional assets and consider alternative investments, while paying attention to the six major risk factors – real interest rates, inflation, credit, liquidity, political and economic.
Mike O’Brien of JP Morgan urged pension funds to focus more on real estate, infrastructure equity and debt, dynamic asset allocation, such as smart indexation, and to use derivatives for tail risk management.
Andrew Kirton, investment consultant at Mercer, recommended that pension funds maintain broader balanced growth portfolios and tilt their portfolios to long term winners, such as emerging market equity and debt.
Kirton said: “You need to hedge at least part of your portfolio against inflation and behave dynamically as events unfold. Anomalies and new opportunities do come up, so you need to build in the flexibility to react quickly to opportunities when they arise, as well as keeping an eye on trading costs. We need to re-think some of the basic thinking.”
