Global pension funds want their asset managers to bring back a human element to their risk management processes, according to a new report.
Pension plans indicated that as part of their wish list to improve the outcomes of product innovation in recent years, they want asset managers "to create a strong overlay of human judgment in risk models and investment processes", a survey of the 108 pension plans and 396 asset managers conducted by Create Research, Principal Global Investors and Citigroup found.
Principal Global Investors Australia chief executive Grant Forster said in the past some asset managers had relied too much on quantitative data to adjust their risk management policies.
"On 31 of December 2007 you had a track error number which is based on smooth data over the last 10 years. However, in the last 21 days leading up to 31 December 2007 there had been a real increase in risk that you as an investor should be aware off, while your tracking error, if you're still using a 10-year measure, hadn't budged," Forster said.
The practical implementation of a human overlay did not need to be overly complicated, he said.
Principal holds regular risk management meetings in which both quantitative and qualitative analysts discuss the interpretation of signals and base the level of risk taking upon this assessment.
"This concept of a human overlay risk metric is simple, but it gets people thinking. All of our people know where the firm's ideas about risk are going, and then their tracking error limits either decrease or increase," Forster said.
The survey also found pension plans wanted closer cooperation with asset managers on new products.
Forster said partnerships were becoming increasingly more common in infrastructure and private investment transactions. "It is less so if you are driving a plain vanilla equity fund," he said.
The survey found pension plans had been positive on innovation in emerging market equities and bonds, high-yield bonds and exchange-traded funds, while they thought leverage, structured products and currency funds had added the least value over the past 10 years.
"About 39 per cent of the [pension plans] think further product innovation will deliver them genuine value over the next three years. Well, I actually think that is a pretty good result in the context of the last 10 years," Forster said.
"They do want better returns with symmetric fees, but they have not necessarily gone risk averse on us. They will still take risk, but they are going to be more intentional about the risk they are taking."
