Asset allocation drives just half of portfolio performance among European pension funds, according to new research.
A report by Amundi Asset Management and Create-Research said that just as important as selecting asset weightings is the implementation of these decisions—and all parts of the chain must adapt.
The companies referred to implementation as “the alpha behind alpha”, and argued that its significance had risen in recent years due to the increasing influence of politics on financial markets.
“Investors no longer manage risk, they manage uncertainty: the first relies on known probabilities of future returns, the other on guesswork,” said Pascal Blanqué, CIO of Amundi Asset Management. “Pension plans have been enjoined to explore new horizons in the belief that markets are unlikely to normalise any time soon.”
“Without greater collaboration between pension plans, their consultants, and their asset managers, the new changes risk being as durable as the crisis that provoked them.”—Amin Rajan, CEO, Create-ResearchThe research echoes similar comments by Russell Investments in the summer. Associate Director Lloyd Raynor—who is leaving the company to join Insight’s liability-driven investment team—said in July that a focus on asset allocation alone could be inappropriate for some portfolios.
Amundi and Create found that, in response to this change, roughly half of the 190 European pensions surveyed had made “significant” changes to their business models—specifically regarding asset allocation, governance, and execution.
In turn, Create-Research CEO Amin Rajan said service providers also had to adapt to the new needs of pension funds, and develop a better understanding and appreciation of individual pensions’ long term goals and risk tolerance.
“Without greater collaboration between pension plans, their consultants, and their asset managers, the new changes risk being as durable as the crisis that provoked them,” Rajan said. “It is one thing having new asset allocation models for a new age, quite another making them work. It’s time to leverage the collective expertise in the pension value chain.”
The report also warned that tougher tests of new business models were yet to come, having so far benefitted from strong equity markets in the past three years.
“The real test will come when markets go into turmoil,” Amundi and Create said. “Most of the changes have not yet been tried and tested by time or events.”
The report surveyed 190 pension funds across Europe with assets of €1.9 trillion ($2.4 trillion).
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