The many institutions—US public pensions in particular—that still assume 7%-plus annual returns have asset management chiefs worried.
“It is very difficult to go to your board and argue that your expected return should be lower,” said David Hunt, CEO of Prudential’s investment management arm, at the Milken Institute Global Conference on Tuesday. “But that’s exactly what we think asset owners should be doing.”
Managers should pass on the warning to clients, too, according to Hunt. “As fiduciaries, we find right now that one our mains roles is to tell investors that we don’t think their expectations are reasonable.”
Nor are they safe, Hunt stressed. “What could drive bad or bubble behavior? It’s unrealistic return expectations.”
He earned vigorous support from his co-panelists—a rare consensus during their debate on asset management’s ballooning role in global capital markets.
“Pension funds only have two levers,” said Ronald O’Hanley, CEO of State Street Global Advisors. Over-estimate returns long enough, and a defined benefit plan must either break its promises to retirees or charge its mistake to the sponsor.
“This is not a problem that’s going to get better over time,” Hanley warned.
CIOs’ reluctance to deliver bad news to their bosses has fostered the situations, speakers argued—and so have markets. For a number of years, plan leaders had no (immediate) bad news to share.
“Investors got pampered by extraordinarily strong securities markets,” said Hilda Ochoa-Brillembourg, founder of outsourced-CIO firm Strategic Investment Group. “But that’s not an accurate expectation for the future.”
Nouriel Roubini, famed doomsayer and chairman of Roubini Global Economics, found himself, for once, in the majority opinion.