In addition, a more stringent reporting framework was launched at the PRI in Person event in Cape Town in early October. The new framework requires PRI signatories to publicly report on their progress towards implementing the PRI’s six principles each year across a wider range of asset classes and investment activities, including voting and engagement, manager selection, appointment and monitoring and the integration of ESG factors into investment decision-making processes and ownership practices. Signatories that fail to report will be delisted from the PRI in the second half of 2014.All this has added to the tumultuous year at the PRI.However, the six Danish pension funds say they left the PRI over governance issues, and a lack of transparency and democracy, which is in stark contrast to the initiative’s principles calling for better corporate governance and engagement with companies that could improve in this regard.In a statement, the schemes said: “We have, over an extended period of time, observed with concern that the governance of the PRI organisation does not live up to the basic standards we as investors require of the companies in which we invest. Despite several attempts to improve the conditions within PRI, we must, unfortunately, acknowledge these attempts have not been successful. We have therefore elected to leave the PRI organisation until the organisation re-establishes the fundamental principles of governance that existed before the organisation on its own initiative in 2010-11 radically changed the organisation’s constitution without the involvement or consent of its members at the time.”The radical change among others included the abolishment of the PRI’s AGM, the requirement of a 10% minimum investor backing to achieve any kind of non-binding and consultative vote and a lack of transparency about the discussions taking place and decisions taken in PRI’s managing bodies – the PRI Advisory Council and the PRI Association Board.The PRI said it was “deeply disappointed” about the Danish exodus, stating that it had committed to undertake a review of its governance in Cape Town and that the Council’s governance committee had already begun to define the scope of the review, which would be led by a new Council Chair expected to be appointed in early 2014.But, as companies grow bigger, a strong sense of self-belief may develop, one that is so strong it refuses to listen to its shareholders – in other words, it is the company’s way or the highway.Is the PRI in a similar situation now? Has it grown to such an extent it no longer takes on board what its signatories are saying?Meetings with signatories were held behind closed doors in Cape Town, but there were some whispers about dissatisfaction with the way it is run.Since the Danish exodus, other investors such as ABP, PGGM and MN Services in the Netherlands have, while reaffirming their commitment to the project, conceded that governance at the PRI could be improved. Some linked the less-than-transparent governance structure to the fact the organisation is no longer officially part of the UN.Has the time come for the organisation to sit back and listen to its fee-paying members – without which it would be nowhere?Sure enough, asset managers – most recently Austrian asset manager Raiffeisen Capital Management – continue to flock to the initiative in an attempt to attract clients that increasingly see ESG as part of their investment strategy.But with investment managers currently outweighing asset owners to a ratio of 775:278, the PRI has to be careful not to loose its most powerful asset owner members, which are less likely than asset managers to see this as a window-dressing exercise.The Danish exodus may have been an unwanted, early Christmas present – but there were early warning signs that were not taken seriously. In Cape Town, investors were warning the PRI it was in danger of becoming an inward-facing country club.But make no mistake, being part of the PRI does not make an investor more responsible – that always comes from the investor himself, club membership or not. The PRI has paid the price for failing to heed asset owners’ concerns over governance, says Nina Röhrbein.While you have to acknowledge the phenomenal growth of the UN-backed Principles for Responsible Investment (PRI) to more than 1,200 signatories, the exit by six of Denmark’s pension funds – well known for their integration of environmental, social and governance (ESG) issues – has clearly put a question mark over the organisation.Doubts that already existed about the organisation may have been reinforced by the bold move taken by ATP, Industriens Pension, PensionDanmark, PKA, Sampension and PFA Pension. In turn, it may also strengthen the faith some current signatories have in the initiative.The PRI has undergone some significant changes in the past 12 months. Founding executive director James Gifford stepped down late last month to pass the baton onto managing director Fiona Reynolds. Earlier this year, PRI Association chairman Wolfgang Engshuber resigned, reportedly over differences of view with the PRI board, while former head of policy at BT Pension Scheme Pension Management Helene Winch joined as the PRI’s director of policy and research.
PGGM has boosted its investments in Chinese logistics, committing a further $144m (€106m) to a strategy managed by The Redwood Group.The Dutch pension fund asset manager has now invested $270m in the strategy – following an initial €95m investment in 2012 – on behalf of the PGGM Private Real Estate fund.Redwood is targeting Chinese logistics on behalf of the fund in a “develop and hold” approach.It will be able to deploy up to $560m when taking into account a $10m co-investment and leverage, PGGM private real estate senior investment manager, Thijs Schoenaker, told IPE sister publication IP Real Estate. “We feel Chinese logistics property still has much to offer,” he said.“Stock is very limited. Economic growth, urbanisation and the growth of consumption and e-commerce mean demand is still strong.”Redwood, he added, expanded its Chinese operations in the past two years as well as its Singapore-based fund management platform.The firm, Schoenaker said, strengthened its investment processes, integrating ESG factors.PGGM has also committed to Redwood’s Japan Logistics Fund, with Redwood growing its Japanese operations.Schoenaker said, despite concerns over prospects for the Chinese economy, he did not expect a “hard landing” and that PGGM would continue to invest in China.“We are aware it’s slowing down,” he said. “However, the growth is becoming more sustainable over the long term.“The central government is transforming the economy from being export and investment-driven to consumption driven.“Logistics is one of the sectors that will benefit from that, and this investment will contribute to the Chinese economy and the creation of jobs.”PGGM, he said, remained confident in China’s retail sector – a “real long-term business case”.Since 2006, it has invested $600m in a portfolio of 37 malls including offices and residential elements as part of mixed-use schemes via the CapitaMalls China Funds.
Last year, Kames, which has £51.7bn under management, was given a £85m mandate by the Kelda Group Pension Plan.The Coca-Cola Enterprises Pension Scheme awarded Kames a £32m indirect property mandate from its £750m Coca-Cola Enterprises Pension Scheme, as well as £19m of equity for investment.The mandate was transferred from CBRE Global Multi-Manager last July.Mark Bunney, Kames’s head of indirect property, told IPE sister publication IP Real Estate the UK secondary market had been active for some time, as a consequence of renewed appetite for real estate.He said: “Prices have increased in the last 12 months, moving the market from a discount to NAV to, in some cases, a premium to NAV. That reflects the increased demand for property.”He said Kames had used the secondary property to invest a “large cash allocation” for a previous client, making a substantial saving compared with a full offer on the primary market.Kames’s indirect property team of Bunney, Matt Day and Tony Yu joined the business in 2012 from ING REIM, taken over by CBRE GI in 2011. Kames Capital has been awarded two indirect property mandates worth £153m (€194m).The Aegon subsidiary declined to reveal who awarded them.A corporate pension fund, it said, awarded it a £103m mandate, while a university pension scheme awarded a £50m mandate.The former is fully invested.
In a joint statement, Xavier Rolet, chief executive of LSEG, and Len Brennan, president of Russell Investments, said after a comprehensive review the sale of the investment business would be explored.The pair said expressions of interest had already been received and confirmed the asset management business would only be sold in its entirety.“LSEG remains highly focused on management and employee continuity, enabling strong support for growth and innovation across the business and ensuring that Russell’s strong heritage and business values continue to be reflected,” they said.LSEG also said that, while selling the investment arm, it would continue integrating Russell Indexes into the FTSE business.In May last year, LSEG expressed interest in purchasing Russell Investments from then-owner Northwestern Mutual, a US insurance firm, which would only sell Russell Investments as whole.The merging of the FTSE and Russell Indexes would give the UK company a stronger foothold in the US indices market, one currently dominated by rival S&P.However, the asset management, investment consultancy and fiduciary management business never fit in with LSEG’s long-term business strategy.LSEG launched a firm $2.7bn bid in June, announcing an immediate review of the investment business. The London Stock Exchange Group (LSEG) has confirmed its willingness to sell the investment management arm of Russell Investments, after its $2.7bn (€2.4bn) takeover last year.In June, the London indices and stock exchange group launched a formal takeover bid of the company to pair its indices business with that of Russell Investments.LSEG is the parent company to FTSE – the London-based indices firm.However, expectations that it would dispose of the investment management surrounded the takeover and has now been confirmed in a letter to clients.
Over the whole of January, Credit Suisse calculated a drop in the foreign equity quota in Pensionskassen portfolios by 7.2% to 16.6% and by 4.9% to 12.7% in the case of Swiss equities.However the bank noted that Pensionskassen had ”on average topped up their equity investments”, judging by the much greater equity losses suffered by comparable benchmark indices.In January the share of foreign bonds fell by 8.4% while the liquidity quota increased by 220 basis points to 8.7%, Credit Suisse pointed out in the first ever special edition of its usually quarterly Pensionskassenindex, issued for January in the wake of the SNB decision.The exposure to Swiss francs increased by 110 basis points to 78.8%, while that to euros and US dollars fell by 30 basis points, respectively, to 4.2% and 7.4%.Credit Suisse pointed out without hedges the drop in euro and US dollar “would have been twice as much”.Following the market setback the bank predicts Pensionskassen to increase the share of foreign currency investments again but maybe only with hedges.Read more about the impact of currency hedges on Swiss Pensionskassen’s returns Swiss pension funds suffered losses of between 1.7-1.8% in the wake of the Swiss National Bank’s (SNB) decision to end the peg to the euro, accoding to estimates by UBS and Credit Suisse. While both banks blame the SNB’s surprise decision to cut the peg, Credit Suisse noted Pensionskassen had already taken countermeasures.Comparing asset values from the day prior to the announcement and its immediate aftermath, bond prices rose by over 1%, Swiss equities declined 14% in value and the impact of currency volatility on international equities lost Swiss Pensionskassen another 15%, noted UBS. UBS calculated funds had suffered losses of 1.71%, whereas Credit Suisse estimated portfolios had declined 1.83% by the end of January.
Much decision making is predicated on using results from the analysis of discounted cashflows, and these results are highly dependent on the discount rate used. How does one assess a roll of the dice when one of the outcomes is the end of civilisation as we know it?This issue was raised in the 2006 Stern Review on climate change, and it is also true when assessing how to value the effects of losing species and environmental degradation that can lead to the loss of complete ecosystems. Economics does not appear to have a robust framework for assessing multi-generational issues.In these cases, individuals are foregoing consumption not for their own future benefit but for the benefit of their grandchildren and future generations – for posterity – for which the rejoinder has sometimes been ‘what has posterity ever done for me?’The Stern Review estimated that a 1% per annum cost would be needed to protect the world economy from a loss of up to 20% of global consumption. In the case of biodiversity and ecosystem losses, the size of such premiums depends on a number of factors that include the current state of the ecosystem in question; the threshold state at which it fails to deliver ecosystem services; its targeted conservation state; and our best estimate of uncertainties.But there are no market values for any of these measures. Moreover, whilst ethics do not usually play a part in economic theory, a fundamental question arises in any discussion of valuations: what should be an appropriate discount rate to use in the valuation of future benefits?The choice is between giving up current income for the benefit of future generations, or the opposite – gaining benefits now at the expense of future generations. One of the two reasons economists would justify the use of discounting is the inclination of individuals to prefer 100 units of purchasing power today to 101, or 105, or even 110 next year, not because of price inflation (which is excluded from the reasoning) but because of the risk of becoming ill or dying and not being able to enjoy next year’s income.But this should not apply to a nation or human society with a time horizon in the thousands or hundreds of thousands of years. Indeed, as the report argues: “Modern economists favour discounting not because of ‘pure time preference’ but the decreasing marginal utility of consumption as growth takes place. The assumption of growth, measured by GDP, justifies our using more resources and polluting more now than we would otherwise do. Therefore, our descendants, who, by assumption, are supposed to be better off than ourselves, perhaps will be paradoxically worse off from the environmental point of view than we are.”Most of the valuation studies examined in the report used discount rates in the 3-5% range or higher. As it highlights, a 4% discount rate means we value a natural service to our own grandchildren (50 years hence) at one-seventh the utility we derive from it, a difficult ethical standpoint to defend.Clearly, economic growth and the conversion of natural ecosystems to agricultural production will continue. However, it is essential to ensure such development take proper account of the real value of natural ecosystems, which is central to economic and environmental management.The problem is, man-made goods and services are growing in quantity while the services of nature are not. This argues for a discount rate that is negative, on the basis that future generations will be poorer in environmental terms than those living today. Moreover, the real costs of the loss of biodiversity and ecosystems should also include the value of the options inherent in the existence of ecosystems.Whilst this may be difficult to measure, the value placed on conserving resources for possible uses in the future is significant. This is not only because our knowledge of the importance of ecosystem services is expected to improve over time but more significantly because part of the losses of biodiversity and the services it underpins are irreversible.“Economic growth might produce virtual Jurassic Theme Parks for children and adults; it will never resurrect the tiger if and when it goes” says a report entitled ‘The Economics of Ecosystems and Biodiversity’, commissioned by the G8 plus five environment ministers in March 2007.Grappling with discount rates may ultimately lead to the conclusion reached by Goddard in his own report: “Like priests, guardians of the mystical truths of discounting can use the special insights with which they have been blessed either to serve their fellow human beings or to bamboozle the rest of humanity into serving them.”Joseph Mariathasan is contributing editor at IPE The guardians of discounting can use their special insights to serve their fellow human beings or to bamboozle them, Joseph Mariathasan warnsModern finance is based around the idea of discount rates. Indeed, there is a whole intellectual framework built around the idea of adding risk premia to risk-free government bond yields when assessing investment opportunities.Yet the framework is actually very shaky. Nick Goddard of Long Finance published a primer in September on the uses and abuses of discount rates. As an former physicist, he wondered whether the idea was just an unavoidably complex piece of financial wizardry that provided invaluable insights into financial decision-making. Or, alternatively, was it an unnecessarily complex obfuscation, useful mainly for conferring an aura of technical rigour to whatever the banker’s gut-feeling was telling him?His conclusion was that the idea is a mixture of both.
DNB acknowledged that interest cover could jeopardise indexation, as the hedge could reduce the potential for inflation compensation.It also conceded that, in an improving economy, an extensive hedge would decrease the chance of both rights cuts and indexation.This was also the case for the regulator’s stagflation scenario.DNB argued that, given the current low-interest environment, considerable interest risk remained, even if the economy weakened further. “As a consequence,” it said, “even a limited rate decrease could impact negatively on coverage ratio and may trigger the need for rights cuts.”The regulator went on to argue that the nFTK would have a “stabilising effect”, likely to reduce the need for addressing volatility in pension funds’ coverage through an interest hedge.“Moreover,” it added, “the nFTK has reduced the need to take tough measures, such as large rights discounts or premium increases, over the short term.”It said Dutch pension funds must seek a balance between their own recovery potential and the need to protect against downward risks.During this process, schemes must consider the available “steering” mechanisms, their own financial positions and the risk approach agreed between companies and their workers. A survey by the Dutch pensions regulator (DNB) to assess the impact of the new financial assessment framework (nFTK) has concluded that hedging interest risk is still a vital way for pension funds to meet their indexation targets. Analysis of several scenarios showed that extensive interest cover lessened the likelihood of schemes having to make unconditional rights cuts.“However, the potential for indexation could be increased by reducing the interest hedge,” DNB said, adding that the nFTK would enhance this effect.The regulator launched the survey after Parliament approved a motion tabled by Roos Vermeij, an MP for the labour party PvdA, who questioned whether interest hedges under the nFTK might cause problems for Dutch schemes in the event that interest rates increased together with inflation.
The appreciation of the euro against the US dollar stifled investment returns from Portuguese occupational pension funds in the second quarter of 2017, according to Willis Towers Watson.Schemes generated a median return of 0.2% over the period. The average 12-month return to the end of June was 2.7%, compared with a 3.3% return for the 12 months to 31 March 2017. Annualised returns for the three years to 30 June rose to 3%, and reached 5.6% for the five-year period.José Marques, senior investment consultant at Willis Towers Watson, said: “The key factor affecting the returns of all assets for euro-zone investors was the euro’s appreciation against the US dollar. Although global equities performed relatively well in local currency over Q2, the strengthening of the euro versus the US dollar resulted in poor returns, -2.4%, when measured in euros.”However, in Portugal pension funds were largely invested in the euro-zone so the impact of the euro’s appreciation was only modest, he said. He said: “Euro equities outperformed most other geographical equities over the quarter. European equities have performed extremely well this year, boosted by higher company earnings compared with analysts’ estimates, and the defeat of right-wing political parties in France and the Netherlands.”Marques continued: “During the quarter, developed market equities [lost] 2.4% in euro terms, underperforming emerging market equities by 2.1%. Developed French and Italian equities returned the best performance from major regions – 2.3% and 2.2% respectively.”The worst performer in euro terms was equities in developed Asia Pacific ex-Japan, which lost 4.8%, predominantly as a result of euro appreciation against Pacific region currencies.Performance figures were submitted by so-called ‘closed’ funds, which are generally pension plans for a single employer or group of companies, and make up the vast bulk of occupational plans in Portugal.The analysis used data covering around €13bn in assets, equal to 80% of the closed pension fund market in Portugal. It incorporated more than 100 pension funds, including the five biggest pension fund managers in the country.Portuguese pension fund portfolios were still heavily dominated by debt, which made up 51.7% of portfolios (including direct and indirect holdings), according to estimates from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP). The estimates cover 88% of the Portuguese pension fund market at end-March.Equities made up 22.8%, and real estate 13.1%, of portfolios at that date.Meanwhile, Marques said that government and corporate bonds both made a small positive return in Q2 compared with the losses experienced in Q1.For example, 10-Year EMU government bonds returned 1% over the second quarter of 2017, while European corporate bonds – as measured by the Bank of America Merrill Lynch EMU Non-Sovereigns index – returned 0.2% over the quarter. French bonds delivered positive returns due to a fall in French yields following the presidential election.
On average, Swiss pension funds are off the mark when it comes to contributing to reducing global warming.A government-backed survey of investment portfolios found that strategies were on average in line with the global climate warming by 6°C by the end of this century, rather than the 2°C maximum set by the Paris Agreement on climate change.“Collectively, the financial flows underlying the corporate bonds and listed equity portfolios of Swiss pension funds are currently on a 6°C pathway,” a report on the survey stated.However, the authors emphasised there were “significant differences” between portfolios of the participating pension funds. In spring this year, Swiss government authorities offered the country’s pension funds and insurers an opportunity to test their equity and corporate bond portfolios to check their compatibility with this climate goal, as reported by IPE.In total, 87 investors participated, among them 66 pension funds with CHF177bn (€151.8bn) in total assets – well over half of the total assets in the market.The survey found two main factors contributing to this misalignment with the 2° goal. On the one hand, “companies in these portfolios are currently investing to increase production across all high-carbon technologies”, the report said.In addition, “investment in low-carbon alternatives is lacking”, it said.Researchers also noted a 5-15% increase in coal-fired power capacity scheduled for the next five years by the companies held by Swiss pension funds and insurers.“This is primarily driven by investments in non-OECD countries,” the report stated.Each participant was provided with an analysis of their portfolio providing them with a “basis for improving their alignment” and to “increase awareness” of possible climate-related risks to the portfolio.The researchers said: “The analysis presented here can also potentially in the future be used by the Swiss government to report on article 2.1c of the Paris Agreement.”This was a reference to the agreement’s aim to make financial flows “consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.The results chimed with a report issued earlier this year by asset manager Schroders, which warned that the world was on course for a long-term temperature rise of 4°C.
“Furthermore, the approach should be tailored to the unique features of the Swiss equity market,” the investor said.Managers pitching for the business should have at least CHF200m under management in the strategy, and at least CHF1bn across the firm.The minimum track record required is one year, but the investor would prefer a 10-year record if available. Performance should be stated gross of fees to 31 December 2017.The investor stated: “This mandate can potentially be integrated into the umbrella structure of an existing single-investor fund with our custodian UBS.”The IPE news team is unable to answer any further questions about IPE Quest, Discovery, or Innovation tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 3465 9330 or email [email protected] A Swiss pension fund is seeking exposure to its domestic equities market through a factor investing mandate, via IPE Quest.According to search QN-2413, the investor plans to allocate CHF350m (€302m) to a multi-factor strategy.The strategy should include exposure to value, momentum, low risk and quality, the pension fund said.It added that “additional factors can be included, if the added value can be shown”.