By Remco van Eeuwijk
As the gateway to immortality, the legend of the Holy Grail is one of the most enduring in Western European literature and art, preoccupying theologians for centuries. Whether or not the Grail existed, it serves to show us a recurring motif in human behaviour – our propensity to believe, beyond all reason, that the unobtainable exists – if only we could just get our hands on it!
Reflective of this, although rather less metaphysical, is the search by trustees and pension schemes for the perfect investment to cure deficit-induced ills. With a multitude of investment products on the market, the superior returns they promise can be a tempting proposition for pension funds under pressure to improve funding and reduce those deficit levels.
Saying “no” and knowing when not to act, can often be the hardest decision to make – the practicalities of assessing costs and risks can sometimes seem dull in comparison with an interesting new investment proposal. Placing greater emphasis on short-term performance at the expense of more durable sources of returns can quickly lead to a deviation from a forward-looking and stable investment plan.
Overcoming our behavioural biases is no mean feat and the most effective way to navigate a complex and confusing investment environment is to keep things simple. Here, I highlight areas where one has to strike the balance between complexity and keeping things simple:
– The identification of market ‘fads’ can benefit from a simple approach. Investors should beware of products which, at first glance, appear to be new, one-stop solutions but in some cases could just be a simple repackaging of old ideas.
– A further point to note is that where the majority of new investment ideas might work individually, this could differ dramatically at portfolio level.
– Before allocating assets, trustees should, above all, question whether or not it fits into their existing portfolio and review their original mandate.
– Similarly, ongoing monitoring of the investment should be considered. Not only must risks be assessed at the time of the asset allocation but also continuously throughout the lifespan of an investment.
– This is particularly important if an investment is complex. Considerable resource will need to be allocated to this which, combined with other costs, may – on balance – make a small allocation barely worthwhile.
– With long-term allocation counting for the vast majority of returns, diverting assets elsewhere will naturally distort drivers of returns even before consideration of management fees.
– This is not to say that a change in strategy is not advisable in certain circumstances but, rather, a balance between long-term and short-term decision-making can help to limit the size of tactical bets and reduce the amount of risk necessary to achieve funding objectives.
It’s a safe bet that the Holy Grail will remain eternally elusive. Back on planet earth, one step on the road to avoid your funding goal assuming its own mythical status is to keep the long-term objectives of your scheme at the apex of pragmatic decision-making.
Remco van Eeuwijk is managing director at MN UK
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