FundForum 2012 LIVE: CIOs wrangle over emerging markets as “fear index hits 9.8”
The past 10 to 15 years have been a “rollercoaster experience for investors”, according to Giordano Lombardo, group chief investment officer at Pioneer Investments, and buy-and-hold strategies have been disappointing. “New players like hedge funds have come into play to deliver alpha by timing the markets better, but they have also disappointed. There’s nothing new under the sun.”
The second plenary session at FundForum International brought together a panel mostly consisting of CIOs to discuss where investment returns are going to come from in the future and what the long-term implications are for how asset management businesses are managed – a fraught subject in an environment where “if we ran a fear index today, it would be 9.8 across the continent”, in the words of BlackRock’s Joseph Linhares.
Chairing the session, Citi’s Neeraj Sahai (pictured) asked panel members what strategies had worked in the past and what lessons had been learned. “Thinking about investment objectives is critical, as there’s no way to make money without risk,” said Jose Antonio Blanco, CIO, UBS Global Asset Management, who admits he welcomes movements in global markets as he likes allocating to different asset classes.
“We’re always more intelligent with hindsight,” said Mussie Kidane, head of fund selection at Pictet. “In the period prior to the financial crisis perhaps investors’ expectations were overly high. If we’ve learned anything, it’s that before investing we need to clearly establish expectations.”
Wellington Management uses functional asset allocation schemes to help investors overcome their usual tendencies to buy and hold. “We need a better way to make asset allocation decisions,” said the firm’s co-head of asset allocation, Wendy Cromwell.
Joseph Linhares, who heads iShares for EMEA, said BlackRock was seeing a “big trend towards indexing among the major distributors, mixing alpha and beta. Some products are tactical, others are strategic. The focus on outcomes is part of this positive shift – which could be through asset allocation or product design.”
Kidane said that in every investment decision Pictet makes, “the key is to know our clients and understand exactly what they are trying to achieve.. The problems we’re facing now won’t be solved overnight. The deleveraging process will take a long time. Now may be a good time to get into equities for certain investors – not all – who want to take on risk.”
However, Lombardo acknowledges that achieving the desired outcomes is not easy, because there are fewer safe assets offering opportunities, and that the opportunities in risky assets are also “pretty poor”. The continued risk on/risk off sentiment is also a challenge. “The way to add value is to find cheap assets, but they’re cheap for a reason, so you have to exercise judgment,” he said. “Asset allocation is key, but it’s getting harder.”
According to Blanco, clients need more outcome-oriented solutions but must understand that they’re not risk-free. “To generate income, you need to be more flexible and invest in more asset classes,” he said.
Emerging markets are a divisive issue. Pointing to the lack of liquidity and issuance in emerging market bonds, Cromwell said: “Developed market bonds are still more of a safe haven.” But Kidane disagreed, saying: “There’s no such thing as risk-free assets. If you think that, you’re in trouble. Any asset can be safer provided you buy it at the right price.”
Cromwell said bluntly: “I don’t think anyone should invest in an emerging market index fund. I don’t understand the reasons for wanting to do that.” But Linhares responded that with USD100bn in two US ETFs investing in emerging markets, they were a legitimate investment tool.
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