Investment Beliefs

1
Investment Beliefs

• Kees Koedijk, University of Tilburg
• Alfred Slager, PGGM Investments / RSM Erasmus
  University

2
What makes an investor great?

• Investment management
• Investment managers need an investment process in
  sync with theory (Damodaran 2007)
• Upward potential for good governed pension funds
  (Ambachtsheer 2007), best governed pension funds
  focus on coherence, process and people (Roger and
  Urwin 2007)
• Strategic management
• Identifying core competences, aligning
  organization
• Common thread focused investment beliefs

3
Focus on investment beliefs

• Why not?
• Companies have to articulate their unique selling
  proposition for their client(s)
• Especially in financial markets where different
  visions co-exist
• If not
• It becomes difficult for trustees to evaluate new
  developments, and whether to embed them in their
  own strategies
• More likely to join the herd, increasing costs
  and opportunity costs along the way

4
Vanguard
''consistently outperforming the financial
markets is extremely difficult''.
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Research set up

• Our paper investigates
• What investment beliefs are out there
• How do investment beliefs of pension funds and
  asset managers differ
• Can we say something about their link to
  performance
• Data collection
• Web site, (annual) report, presentations
  collections
• Focus on largest asset managers and pension funds
• Scope publicly reported beliefs (the explicit
  ones)

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Theory behind investment belief
Investment Belief
Theory Investment Strategy
Organization
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New Zealand Superannuation Fund
exploit the premium available to investors who
do not require liquidity. Our long investment
horizon, combined with no outflows, means we
are extremely well positioned to capture this
premium.
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From beliefs to philosophy
Investment philosophy
Coherent set of beliefs


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Sample 23 pension funds and 17 asset managers
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4 groups of investment beliefs
Financial Markets beliefs
Investment process beliefs

• Risk premium
• Risk diversification
• (In)efficiencies in financial markets, Asset
  pricing
• Horizon

• Impact, focus on management decisions
• Risk management
• Investment management style
• Costs

Sustainability and Governance
Organizational beliefs

• Sustainability and Corporate Governance in
  asset pricing
• Role in investment process

• Teams, role of investment managers
• Out vs. insourcing
• Experience

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PGGM
capitalize on our strength as a long-term
investor. We can select investments which
generate a high return in the long term, even
though they may suffer short term losses.
12
PensionDanmark
According to PensionDanmark, the best investment
results are most likely to be achieved with a
relatively small and focused investment team
combined with a high degree of outsourcing to
external managers.
13
OTPP
managing investment risk is just as important as
generating returns. Maintaining a
well-diversified portfolio is the cornerstone of
the Fund's risk management program.
14
ABN Amro
Expects over the longer term to see the majority
of value added come from stock selection as this
normally represents a more stable and consistent
source of out-performance.
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Some beliefs are more equal
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Differences in pension funds and asset managers
Pension fund Asset manager
Risk diversification Risk premiums Responsible
Investments Goals
Inefficiencies Active management Teams and
staff
Focus Impact Risk man.
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Relationships between beliefs

• Weak relationships expected and found suggests
  sensible thought-out processes
• Some relationships show up, suggesting
• Organizations which hold beliefs about where
  their added value is, tend to apply it in the
  investment process.
• The impact of lower costs becomes more visible
  with a longer time horizon.
• Beliefs about risk diversification and
  inefficiencies are in some cases passed on to the
  external managers that pension funds select.
• On the other hand, pension funds with beliefs
  about in- and outsourcing are more focused on the
  organizations goals and pension liabilities.
• Some organizations consider risk premia in a
  broader setting

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Forging a link
Performance measures
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Descriptives
Pension funds create alpha
Are well diversified
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and report lower costs
Pension funds create high return/risk
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Links exist

• Between several investment beliefs and structural
  performance measures.
• Organization with investment beliefs on risk
  diversification also show better return-risk
  performance measures, but also lower costs. Focus
  pays off.
• Funds that hold a clear view on how risk
  management is organized, usually in combination
  with a view on the management style, realize
  higher alpha and return/risk ratios than funds
  that do not hold such views.

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Some caveats

• Small sample, yet the broadest so far
• Performance measures are relatively crude,
  managers might have other performance measures in
  mind
• Weve collected the explicit reported ones, what
  about the non-reported implicit ones? Every
  pension fund holds them per definition.

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Summarizing

• Investment beliefs still relatively unexplored?
• Developing a set of investment beliefs makes
  sense from a strategic perspective an
  organization has to identify where and how it
  does add value to the investment process.
• Structure emerges
• Beliefs about the financial markets, investment
  process, organization, and sustainability and
  corporate governance.

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• Pension funds and asset managers differ
• A pension fund focuses on risk diversification,
  getting its beta right.
• An asset manager stresses the role of risk
  management and argues for a particular investment
  style. Asset managers emphasize the quality of
  their organization.
• Promising link between beliefs and performance
• An organization with investment beliefs on risk
  diversification shows better return-risk
  performance, but also lower costs.
• Funds that hold a clear view on how risk
  management is organized, usually in combination
  with a view on the management style, realize
  higher alpha and return/risk ratios than funds
  that do not hold such views.
• Investment beliefs framework helps focus
  investment strategy, governance and results