What Pension Fund Investors
Could Learn from Adair Turner
economy private sector leverage, with
private credit growing rel...
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What Pension Fund Managers Could Learn from Adair Turner - Interview: Adair Turner, former Chairman, Financial Services Authority - EPI Summit 2014

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Adair Turner, a speaker at the marcus evans European Pensions & Investments Summit 2014, shares his outlook on the economy and what implications it may have on investors.

Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today.

For more information contact: emailus@marcusevans.com

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What Pension Fund Managers Could Learn from Adair Turner - Interview: Adair Turner, former Chairman, Financial Services Authority - EPI Summit 2014

  1. 1. What Pension Fund Investors Could Learn from Adair Turner economy private sector leverage, with private credit growing relentlessly faster than nominal GDP; (ii) an explosion of complexity within the financial system which, far from making the system safer, increased the danger of selfreinforcing reflexive reactions between different credit and derivatives markets which resulted in first excessive exuberance and then a collapse. Interview with: Adair Turner, Former Chairman, Financial Services Authority (FSA) A drop in interest rates in the past 15 years has induced a “ferocious „search for yield uplift‟”, making some pension fund investors “susceptible to claims that clever financial structuring could deliver additional yield without apparent additional risk,” according to Adair Turner, Former Chairman, Financial Services Authority (FSA). “With extra returns almost always comes greater risk. Returns have to be earned by taking controlled and carefully managed risk,” he says. Lord Turner is a speaker at the marcus evans Europ ean P en sions & Investments Summit 2014, in Montreux, Switzerland, 28 - 30 April. What drove the financial crisis of 2008 and what factors are critical for a stable and growing economy? Ahead of the 2008 crash, many central bankers and regulators believed that the global economy and financial system had become more stable, that a “Great Moderation” reigned. The orthodox assumption was that achieving low and stable inflation was sufficient to ensure macro-economic stability; and that financial innovation, securitisation, structuring and derivatives had increased the resilience of the financial system. But it all ended in disaster. The fundamental drivers of that disaster were: (i) a sustained rise in real To ensure a more stable economy, central banks need to be focused not just on low and stable rate of inflation, but on the control of the credit cycle. What lessons did pension investors learn from the crisis? Were they guilty of “pre-crisis delusions”? There is no free lunch. With extra returns almost always comes greater risk. Nominal and real interest rates fell relentlessly in the 15 years running up to the crisis. In 1990, a pension fund could buy a 20-year GBP or USD indexlinked bond giving a guaranteed real return of over three per cent; by 2007 the equivalent was 1.5 per cent. Not surprisingly, this induced a ferocious “search for yield uplift”. That made some pension fund investors susceptible to c laim s that c lev er f inanc ial structuring could deliver additional yield without apparent additional risk. And that helped drive the uncontrolled growth of real economy credit packaged into apparently low risk securities, particularly in the US. Global economic activity strengthened in the second half of 2013. What is your growth forecast? What vulnerabilities still need to be managed better? The US economy is now recovering reasonably well – but with a very low rate of employment. The UK is also recovering, but in a very unbalanced fashion, too reliant on house price increases and on London‟s extraordinary success. The Eurozone faces the real danger of deflation, and the ECB will need to take offsetting measures. 2014 is the crunch year for Abe-economics: the April sales tax increase may produce a significant slowdown; expect to see still more radical stimulative action from the Bank of Japan. But the most important economy to watch is China. Since 2008, growth has been sustained by extraordinary credit growth. The authorities know they need to slow the boom down, but achieving a soft landing is very difficult. If they do not manage the transition well, China could be the origin of the next financial crisis. The most important economy to watch is China What implications does that carry for pension funds and other asset managers in Europe? We are in a period of very low nominal and real interest rates on risk-free or very low risk bonds. In the Eurozone and Japan that will remain so for many years; even in the US and UK rates may stay lower for longer than some market participants now think. Returns therefore have to be earned by taking controlled and carefully assessed risk. Long-term infrastructure financing should provide opportunities for superior yield based on operating cash flows rather than “innovative” structuring. Higher yield dividend stocks may provide good long-term value. Focus on sustainable real economy investments: beware the complex highly leveraged structures whic h are bound to proliferate the longer ultra-low interest rates last.
  2. 2. About the European Pensions & Investments Summit 2014 The Investment Network – marcus evans Summits group This unique forum will take place at the Fairmont Le Montreux Palace, Montreux, delivers peer-to-peer information Switzerland, 28 - 30 April 2014. Offering much more than any conference, on strategic matters, professional exhibition or trade show, this exclusive meeting will bring together esteemed trends industry thought leaders and solution providers to a highly focused and interactive and breakthrough innovations. networking event. The Summit includes presentations on increasing fund resilience, establishing a robust risk framework, capturing investment opportunities and assessing the true value of emerging market investments. www.epi-summit.com Please note that the Summit is a closed number business of event participants and the strictly limited. Contact Sarin Kouyoumdjian-Gurunlian, Press Manager, marcus evans, Summits Division Tel: Email: + 357 22 849 313 press@marcusevanscy.com For more information please send an email to info@marcusevanscy.com All rights reserved. The above content may be republished or reproduced. Kindly inform us by sending an email to press@marcusevanscy.com About marcus evans Summits marcus evans Summits are high level business forums for the world‟s leading decision-makers to meet, learn and discuss strategies and solutions. Held at exclusive locations around the world, these events provide attendees with a unique opportunity to individually tailor their schedules of keynote presentations, case studies, roundtables and one-to-one business meetings. For more information, please visit: www.marcusevans.com Upcoming Events APAC Investments Summit - www.apacinvestmentssummit.com Elite Summit - www.elitesummit.com Emerging Markets Investments Summit - www.emisummit.com Private Wealth Management Summit (North America) - www.privatewealthsummit.com To view the web version of this interview, please click here: www.epi-summit.com/AdairTurner

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