FOR INSTITUTIONAL USE ONLY © 2004 MFS Investment Management ...

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  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • The Number of funds nearly tripled from 3000 to more than 8,200 from 1990 to 2002. Source: ICI.
  • FOR INSTITUTIONAL USE ONLY © 2004 MFS Investment Management ...

    1. 1. Pension Sponsors and Asset Managers: Current Issues Robert C. Pozen Chairman MFS Investment Management ® Pozen: PensionSponsorsAssetMgrs November 2004
    2. 2. Agenda Portfolio Strategy Hedge Funds Brokerage Costs Potential Conflicts
    3. 3. Asset Allocation <ul><li>Asset allocation, rather than security selection within asset class, drives 90% of long-term, plan returns </li></ul><ul><li>Yet most plan trustees and consultants focus most of their attention on: </li></ul><ul><ul><li>Defining careful mandates for each sub-asset class </li></ul></ul><ul><ul><li>Choosing right manager(s) for each sub-asset class </li></ul></ul><ul><li>New incentives are needed to reward good asset allocation </li></ul>Portfolio Structuring
    4. 4. Bond Mandates <ul><li>Prospects of rising interest rates undermine attraction of long maturity, high-grade bonds </li></ul><ul><li>Fixed-income strategies for pension plans </li></ul><ul><ul><li>Match short-term bonds to near-term payout schedule </li></ul></ul><ul><ul><li>Use TIPs to match long-term liabilities </li></ul></ul><ul><ul><li>Use Core Plus to reduce duration </li></ul></ul><ul><li>Emerging market debt coming of age* </li></ul><ul><ul><li>Improving fundamentals in many nations </li></ul></ul><ul><ul><li>Increasing participation from institutions </li></ul></ul><ul><ul><li>Less volatile than in prior years </li></ul></ul>Portfolio Structuring Source: JP Morgan
    5. 5. Alternative Investments <ul><li>Private equity funds </li></ul><ul><li>Pure long-short funds </li></ul><ul><li>Other hedge funds </li></ul>Portfolio Structuring
    6. 6. Future Prospects on Returns <ul><li>Huge increase from 1990 to 2003 </li></ul><ul><ul><li>2,000 to 8,000 funds </li></ul></ul><ul><ul><li>$40 billion to $817 billion </li></ul></ul><ul><li>Returns slightly ahead of S&P 500, with less volatility than index </li></ul><ul><ul><li>But only voluntary reporting </li></ul></ul><ul><ul><li>Bias from non-survivors </li></ul></ul><ul><li>Must find new strategies to succeed </li></ul>Hedge Funds Source: The Wall Street Journal
    7. 7. Monitoring Issues for Plans <ul><li>Calculation of fees </li></ul><ul><ul><li>1% to 2% of average assets </li></ul></ul><ul><ul><li>Plus 20% of gain (above what?) </li></ul></ul><ul><li>Valuation of portfolio securities </li></ul><ul><li>Degree of leveraging (borrowing) </li></ul><ul><li>Opportunities for exit </li></ul>Hedge Funds
    8. 8. Regulatory Reforms <ul><li>Big increase in enforcement cases </li></ul><ul><li>Proposed registration as advisers </li></ul><ul><ul><li>No substantive regulation </li></ul></ul><ul><ul><li>Exemption of performance fees </li></ul></ul><ul><ul><li>Periodic SEC inspections </li></ul></ul><ul><li>Registration of fund of funds </li></ul><ul><ul><li>Sold to investing public </li></ul></ul><ul><ul><li>Disclosure not substantive regulation </li></ul></ul>Hedge Funds
    9. 9. Soft Dollars <ul><li>Definitions </li></ul><ul><ul><li>Seeking best execution: highest total proceeds, not lowest commission rate </li></ul></ul><ul><ul><li>Soft dollars = paying more than best execution in return for goods and services </li></ul></ul><ul><li>Types of soft dollar services </li></ul><ul><ul><li>Security research </li></ul></ul><ul><ul><li>Market data </li></ul></ul><ul><ul><li>Computer systems </li></ul></ul><ul><ul><li>Administrative services </li></ul></ul>Brokerage Costs
    10. 10. Current Controversies <ul><li>Scope of safe harbor for soft dollars </li></ul><ul><ul><li>Intellectual content on research </li></ul></ul><ul><ul><li>Meaning of other brokerage services </li></ul></ul><ul><li>Suppliers and users </li></ul><ul><ul><li>Mutual funds versus separate plan accounts </li></ul></ul><ul><ul><li>Wall Street firms vs. Independent research boutiques </li></ul></ul>Brokerage Costs
    11. 11. Execution Quality <ul><li>Full-service vs. electronic networks </li></ul><ul><ul><li>Commission rate vs. price </li></ul></ul><ul><ul><li>Capital to complete trades </li></ul></ul><ul><li>Measures of efficiency and value added </li></ul><ul><ul><li>Average commission per share </li></ul></ul><ul><ul><li>Plexus, Abel-Noser, ITD </li></ul></ul>Brokerage Costs
    12. 12. Managing Different Kinds of Accounts <ul><li>Compensation structures </li></ul><ul><ul><li>Percentage of assets managed </li></ul></ul><ul><ul><li>Performance based fees </li></ul></ul><ul><li>Allocation of shares </li></ul><ul><ul><li>Scarce shares in IPOs </li></ul></ul><ul><ul><li>Trades spread through day </li></ul></ul><ul><li>Clashes between shorts and longs </li></ul>Potential Conflicts
    13. 13. Providing Multiple Services <ul><li>Pensions consultants moving into asset management </li></ul><ul><li>Performance measurement firms offer retail tools to choose portfolios </li></ul><ul><li>Asset managers go into actuarial services and/or human resource outsourcing </li></ul>Potential Conflicts
    14. 14. Employer Stock <ul><li>Retirement plans in the US often hold substantial portions in employer stock </li></ul><ul><li>Many companies use employer stock to meet DB or DC funding obligations </li></ul><ul><li>Is pension trustee or pension participant free to sell the employer stock? </li></ul><ul><li>Is the participant exposed to double risks, investment and employer stock risk, if the company becomes troubled? </li></ul>Potential Conflicts
    15. 15. Conclusions <ul><li>The relationship between plan sponsors and their asset managers is evolving from an arm’s-length outside contractor to a strategic long-term partner </li></ul><ul><li>Asset managers will increasingly be asked not just to manage portfolios but also to provide informal supplemental advice on: </li></ul><ul><ul><li>Asset allocation </li></ul></ul><ul><ul><li>Performance attribution </li></ul></ul><ul><ul><li>Regulatory developments </li></ul></ul><ul><ul><li>Investment trends </li></ul></ul>
    16. 16. Conclusions (continued) <ul><li>Plan sponsors will increasingly seek asset managers that have a sound investment process and also meet ethical criteria: </li></ul><ul><ul><li>Present minimal conflicts of interest </li></ul></ul><ul><ul><li>Reduced reliance on soft dollars </li></ul></ul><ul><ul><li>Reasonable fee structures </li></ul></ul><ul><ul><li>Governance leadership </li></ul></ul>

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