The National Council for Social Security Fund, led by Chairman DAI Xianglong, convened with Goldman Sachs International a one-day seminar to engage leading Chinese policy makers, prominent professionals in international finance and capital markets and senior pension executives. The seminar, titled “International Symposium -- Financial Reforms and Direct Financing Post the Global Financial Crisis” -- took place on
December 1, 2009 in Beijing.
I had the pleasure of chairing a session at the seminar titled Pension Fund Investment Challenges Posed by the Global Financial Crisis. What follows are my opening remarks and highlights fom each of the six presenters that were on my panel.
It is a pleasure to be here and to be engaged again with Chairman DAI Xianglong and the National Council for Social Security Fund and also with senior executives of Goldman Sachs.
Both Chairman Dai and Fred Hu were keynote speakers at PPI’s recent Asian Pension Fund Roundtable in Bangkok, attended by a record number of Asian emerging market pension fund representatives.
Fred spoke convincingly about the outlook for Asian economies. Chairman Dai addressed the deep challenges facing the Social Security Fund and the opportunities he sees for addressing those challenges. We at PPI remain deeply appreciative of the support we continue to receive from the Social Security Fund here in Beijing and from Goldman Sachs, both members of PPI, especially their ongoing encouragement of our work on behalf of sustainable safety nets and capital markets in Asia's emerging markets.
It is my assignment to host the current session of this very important seminar. Each of my colleagues comes from a different region of today's globalized world. Each will offer his own perspective on the challenges that the recent crisis poses for pension managers in Australia, Canada, Korea, France and the European Union, Norway and China, respectively.
Before I introduce this impressive panel, I have been asked to take a moment to set the stage. In anticipation of my assignment, I asked plan sponsor members of the Pacific Pension Institute three questions: 1) Will the recovery last? 2) What are you as long-term investors doing as a result of crisis and now recovery? 3) How do Asia and/or emerging markets fit into these investment plans?
The answers I got back were telling and perhaps predictable.
I start with Bob Maynard, CIO, PERS Idaho. For long-term investors in the PPI-member universe, the recovery's sustainability will depend on policy makers making correct decisions. There is no margin for error. Meanwhile, the de-leveraging is not over. Market reaction to last week's announcement out of Dubai was yet another reminder that our markets are indeed globalized markets.
At CalPERS in California, there is deep worry about an over-leveraged US commercial real estate market. There also are concerns about private equity credit, double-digit unemployment numbers and pressures on state and local governments leading to more layoffs, furloughs and benefit reductions. Texas Employee Retirement System, which has considerable investments in emerging markets, worries about the signals its fund managers see pointing toward excess liquidity in Asia and the possibility of a property bubble in Hong Kong.
Gordon Fyfe, CEO of Public Sector Investment Board, Toronto, Canada, doubts the recovery will last, but if it does, it will not look like past recoveries. His solution is to keep the Investment Board’s focus on countries with potential for strong growth domestically and on countries that are not dependent on exporting to the United States. He names Brazil, Colombia, India and China. He sees investment in the United States as opportunistic and has a preference for distressed sellers, as opposed to distressed assets.
PERS Idaho’s CIO considers the "old tools" to be the best and intends to stick to a standard equity/fixed income mix with emphasis on global public markets. He also likes emerging markets, including Asia, as does the CIO at Williams College Endowment Fund. She reports the Williams College endowment is in fact overweight in emerging markets with a substantial exposure to publicly-traded securities rather than private equity. She remains guardedly optimistic about the recovery.
Tomas Franzén, the chief economist for PPI’s single European fund member, AP Fonden 2, believes the recovery is lasting and that it is being led by Chinese and emerging market economies. He singles out Chinese policies that are directed at health care, education and infrastructure as having a positive effect. Still, it would be a mistake to think that Asian emerging markets can pick up the entire slack that has been created by the dislocation in US and European markets.
He also points to what he sees as a deepening transformation in China’s industry sophistication and its financial markets as positive factors. He highlights as another positive for Asia, the regionalization he sees taking place, particularly in ASEAN countries and Southeast Asia. Each of these factors contributes to the distinct advantage Asian economies enjoy over economies that are dependent on commodity plays. The Swedish buffer fund is considering putting in place a specific Asia Pacific strategy, which could include participation in China investment as a QII license holder.
Clearly, the opinions of these long-term investors who represent nearly one-half trillion dollars in assets under management vary when it comes to the recovery’s outlook. But all agree that there is no single, cookie-cutter approach to investing in today’s volatile environment. Any certainty related to perceived advantages of specific asset allocations pre-2007, has been replaced by an emphasis on: 1) assets that can rise at least in line with liabilities and at the same time reflect inherently concerns about inflation; providing for sufficient levels of liquidity; and ensuring that appropriate risk controls are in place. All also agreed that Asia’s emerging markets in particular, will remain a factor in their short- and long-term analysis.
We have six panelists, each of whom is focused on the long-term investment horizon. Four manage funds as senior level executives while two represent firms doing business with funds. All found themselves in the path of the tsunami that had its origins in the US subprime mortgage market. Each had to deal with the crisis as best he could, and each is here to talk about those challenges and the respective recoveries.
Below is a summary of each panelist’s remarks:
Craig Dunn is the managing director and chief executive officer of AMP Limited, a prominent investment firm headquartered in Australia that does business with the superannuation funds. Craig has had a long career with AMP and was appointed its CEO in January 2008.
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In finance, the center of gravity is shifting from West to East. An illustration is HSBC’s recent decision to relocate the investment bank’s chairman from London to Hong Kong.
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It’s important to pause and think about what needs to change both in terms of public policy and investments.
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Sustainable social safety nets are central to a government’s responsibility to its citizens. By the same token, institutional investors should be allocating more to Asia, especially Asian equities.
David Denison is president and chief executive officer of the Canada Public Pension Investment Board. The CPPIB is a Crown corporation established by Parliament in 1997 to manage and invest on behalf of the contributors and beneficiaries of the Canada Pension Plan. David oversees the organization and its investment activities.Lessons learned include:
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It is vital that a fund maintain absolute clarity when it comes to strategic investment objectives. A crisis is a time to be resolute, not a time to question and second-guess strategies. For CPPIB this translated into short-term tactical changes and rebalancing over the course of the crisis.
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A fund must insure its underlying liquidity. Because CPPIB followed this rule, it ended up providing liquidity during the dark days of the crisis. This meant the fund could earn attractive spreads when acquiring distressed assets.
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The fund did not veer from its “total fund approach” with its emphasis on diversification by risk and return streams rather than specific asset classes.
Sun Chung Kim is chief investment officer of the National Pension Service, Korea. NPS manages the operations and investments of the National Pension Fund and the National Pension system. Mr. Kim was named to his position in 2008.
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The crisis represented volatility in the extreme for NPS, particularly for its equities and currency holdings. Their solution was to hedge back to the won and thereby diminish the impact.
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Between 2004 and 2008, NPS averaged 5% return on its investments. In 2008, the rate of return was 0%.
Antoine de Salins is the chief executive officer of the French Pension Reserve Fund. The Reserve Fund is a publicly-owned, state-funded agency operating under the French minister in charge of social security and the minister in charge of the economy and budget. Antoine also chairs the Reserve Fund’s asset managers selection committee.
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Government must support the investment policy. Trust between key government officials and the investment officers is key to establishing that support.
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There can be no black box. The fund must be transparent in all its dealings and aware of the importance and value of education.
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The Reserve Fund rebalanced on a regular basis during the course of the crisis. But going forward, it will move toward a more dynamic asset allocation.
Yngve Slyngstad, chief investment officer of the Norges Bank Investment Management, was replaced on the panel by Geir Vestrum, chief representative officer at the Norges Bank, Shanghai office. NBIM, charged with managing the assets for the Government Pension Fund Global, is the world’s second largest pension fund and enjoys a long reputation for transparency and shareholder activism. Geir is NBIM’s former senior portfolio manager for equities.
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With US$440 billion in assets under management, NBIM recently increased its allocation to equities from 40% to 60%.
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NBIM describes its investment strategy as similar to that of endowments. Its overall allocation is now: 60% equities; bonds, 35%, down from 60%; real estate, 5%, up from zero.
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NBIM has a QFII license and is in the process of applying for an increase in the cap on allowable investments.
Xiao Feng is founder, vice chairman and president of Bosera Asset Management Co. Bosera was established in July 1998 as one of the first five asset management companies to be set up in China and is one of the largest managers for the NCSSF and China’s enterprise annuity funds.
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The focus of Bosera’s investments is value.
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Its approach is similar to the long-term approach of endowments.
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As an investor, Bosera does not seek a non-correlated asset allocation.
The other panel sessions addressed the following topics:
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Financial Reform – China’s Financial Development Roadmap under the New Global Economic Setup
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Global Economic Rebalancing and the Role of the RMB
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Direct Financing, Capital Market and China’s Economic Development
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Global Assets Allocation in the Post-Crisis Era
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Closing Summary by Chairman DAI Xianglong
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Introduction of Mr. Blankfein by Li Keping, Vice Chair, SSF.
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