Investment Beliefs   Kees Koedijk, University of Tilburg Alfred Slager, PGGM Investments / RSM Erasmus University
What makes an investor great? <ul><li>Investment management </li></ul><ul><ul><li>Investment managers need an investment p...
Focus on investment beliefs  <ul><li>Why not?  </li></ul><ul><ul><li>Companies have to articulate their unique selling pro...
Vanguard ''consistently outperforming the financial markets is extremely difficult''.
Research set up <ul><li>Our paper investigates </li></ul><ul><ul><li>What investment beliefs are out there </li></ul></ul>...
Theory behind investment belief Investment Belief  Theory  Investment Strategy  Organization Sell with negative, buy with ...
New Zealand Superannuation Fund “ exploit the premium available to investors who do not require liquidity. Our long invest...
From beliefs to philosophy Investment philosophy … = Coherent set of beliefs
Sample: 23 pension funds and 17 asset managers 11 7 Assetmng Pensionfd North America 10 9 Assetmng Pensionfd Europe 0 3 As...
4 groups of investment beliefs Financial Markets beliefs <ul><li>Risk premium </li></ul><ul><li>Risk diversification </li>...
PGGM c apitalize on our strength as a long-term investor. […] We can select investments which generate a high return in th...
PensionDanmark According to PensionDanmark, “the best investment results are most likely to be achieved with a relatively ...
OTPP “ managing investment risk is just as important as generating returns. Maintaining a well-diversified portfolio is th...
ABN Amro Expects over the longer term to see ”the majority of value added come from stock selection as this normally repre...
Some beliefs are more equal…
Differences in pension funds and asset managers  Pension fund  Asset manager <ul><ul><li>Risk diversification </li></ul></...
Relationships between beliefs <ul><li>Weak relationships expected and found: suggests sensible thought-out processes </li>...
Forging a link Performance measures Expense ratio Costs Information ratio Alpha Investment Management Style 3, 5, 8 years ...
Descriptives… Pension funds create alpha Are well diversified
… Pension funds create high return/risk and report lower costs
Links exist <ul><li>Between several investment beliefs and structural performance measures.  </li></ul><ul><ul><li>Organiz...
Some caveats <ul><li>Small sample, yet the broadest so far </li></ul><ul><li>Performance measures are relatively crude, ma...
Summarizing <ul><li>Investment beliefs: still relatively unexplored? </li></ul><ul><ul><li>Developing a set of investment ...
<ul><li>Pension funds and asset managers differ </li></ul><ul><ul><li>A pension fund focuses on risk diversification, gett...
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  • Risk premium
  • Is the investment belief then the same as an investment philosophy? Not quite. An investment philosophy combines the investment beliefs. Something to go back to if the strategy does not work anymore (Damodaran, 200x)
  • Risk premium and long term horizon
  • Risk premium and long term horizon
  • Risk premium and long term horizon
  • Risk premium and long term horizon
  • A pension fund… Interprets the consequences of expected risk premiums in the financial markets in making investment strategies, and in particular emphasizes risk diversification. Emphasizes the role of sustainability in their investment philosophy, and other beliefs that relate to their organizational goals. An asset manager… Emphasizes his view on inefficiencies as the basis for active management. Tend to over-emphasize the quality of their organization. Places great value in the teams and staff of their investment organization, stressing risk management along the way. Both pension funds and asset managers Focus on their investment process. However, pension funds tend to stress the decision which has the highest impact, while asset managers tend to stress the role of risk management and the argument for a particular investment style.
  • Some relationships show up, suggesting Organizations which hold beliefs about where their added value is, tend to apply it in the investment process. Positive relationship between focus of management decisions on the one hand (phi=0.26), and the beliefs about in- and outsourcing and pension liabilities on the other hand (phi=0.26). The impact of lower costs becomes more visible with a longer time horizon. Relatively strong positive relationship between beliefs about costs and the investment horizon in financial markets (phi=0.43), reflecting the standpoint that Beliefs about risk diversification and inefficiencies are in some cases passed on to the external managers that pension funds select. Negative relationship between belief about in- and outsourcing (mostly pension funds) and beliefs about financial markets, like risk diversification (phi=-0.26) and inefficiencies (phi=-0.29). On the other hand, pension funds with beliefs about in- and outsourcing are more focused on the organizations goals (phi=0.46) and pension liabilities (phi=0.31). Some organisations consider risk premia in a broader setting beliefs about risk premia are related to beliefs about risk diversification (phi=0.40), but also to beliefs about the role of sustainability and corporate governance .
  • Measure difference in performance measures between companies that do and do not report investment beliefs, for different time periods. Data retrieved for pension funds and asset managers. Exception is alpha, not available for asset managers.
  • Investment beliefs: still relatively unexplored? Developing a set of investment beliefs makes sense from a strategic perspective: an organization has to identify where and how it does add value to the investment process. Investment beliefs are a relatively unknown phenomenon, which seems odd, considering all the management time focused on formulating core competences in companies. Structure emerges Beliefs about the financial markets (risk premium, diversification, time horizon), investment process (risk management, impact of decisions, investment style), organization (teams, in- or outsourcing, role of experience), and sustainability and corporate governance (effect on asset pricing and investment process).
  • Pension funds and asset managers differ A pension fund focuses on risk diversification, getting its beta right. Pension funds stress decisions which have the highest impact. Some pension funds emphasize the role of sustainability and corporate governance. An asset manager stresses the role of risk management and the argument for a particular investment style. An asset manager also emphasizes his view on asset pricing, the basis for active management. Asset managers emphasize the quality of their organization. Promising link between beliefs and performance An organization with investment beliefs on risk diversification shows better return-risk performance, but also lower costs. Funds that hold a clear view on how risk management is organized, usually in combination with a view on the management style, realize higher alpha and return/risk ratio’s than funds that do not hold such views.
  • PowerPoint

    1. 1. Investment Beliefs Kees Koedijk, University of Tilburg Alfred Slager, PGGM Investments / RSM Erasmus University
    2. 2. What makes an investor great? <ul><li>Investment management </li></ul><ul><ul><li>Investment managers need an investment process in sync with theory (Damodaran 2007) </li></ul></ul><ul><ul><li>Upward potential for good governed pension funds (Ambachtsheer 2007), best governed pension funds focus on coherence, process and people (Roger and Urwin 2007) </li></ul></ul><ul><li>Strategic management: </li></ul><ul><ul><li>Identifying core competences, aligning organization </li></ul></ul><ul><li>Common thread: focused investment beliefs </li></ul>
    3. 3. Focus on investment beliefs <ul><li>Why not? </li></ul><ul><ul><li>Companies have to articulate their unique selling proposition for their client(s) </li></ul></ul><ul><ul><li>Especially in financial markets where different visions co-exist </li></ul></ul><ul><li>If not </li></ul><ul><ul><li>It becomes difficult for trustees to evaluate new developments, and whether to embed them in their own strategies </li></ul></ul><ul><ul><li>More likely to “join the herd”, increasing costs and opportunity costs along the way </li></ul></ul>
    4. 4. Vanguard ''consistently outperforming the financial markets is extremely difficult''.
    5. 5. Research set up <ul><li>Our paper investigates </li></ul><ul><ul><li>What investment beliefs are out there </li></ul></ul><ul><ul><li>How do investment beliefs of pension funds and asset managers differ </li></ul></ul><ul><ul><li>Can we say something about their link to performance </li></ul></ul><ul><li>Data collection </li></ul><ul><ul><li>Web site, (annual) report, presentations collections </li></ul></ul><ul><ul><li>Focus on largest asset managers and pension funds </li></ul></ul><ul><ul><li>Scope: publicly reported beliefs (the explicit ones) </li></ul></ul>
    6. 6. Theory behind investment belief Investment Belief Theory Investment Strategy Organization Sell with negative, buy with positive earnings announcement <ul><li>Describes how the investment belief can be exploited. </li></ul>Trading strategy with short term horizon. Good versus bad news announcements have to be identified. Mispricing with information dissemmination Overreaction EXAMPLE <ul><li>Organization to successfully exploit the investment strategy. </li></ul><ul><li>Links the exploitation of the investment beliefs to performance measures. </li></ul><ul><li>Theoretical basis behind the investment belief. </li></ul><ul><li>What is it about that mechanism </li></ul><ul><li>Is it a structural, repeatable phenomenon </li></ul><ul><li>Observes behavior in the financial marketplace; </li></ul><ul><li>Frames why the organization deals with this in a sophisticated way. </li></ul>
    7. 7. New Zealand Superannuation Fund “ exploit the premium available to investors who do not require liquidity. Our long investment horizon, combined with […] no outflows, means we are extremely well positioned to capture this premium.”
    8. 8. From beliefs to philosophy Investment philosophy … = Coherent set of beliefs
    9. 9. Sample: 23 pension funds and 17 asset managers 11 7 Assetmng Pensionfd North America 10 9 Assetmng Pensionfd Europe 0 3 Assetmng Pensionfd New Zealand, Australia
    10. 10. 4 groups of investment beliefs Financial Markets beliefs <ul><li>Risk premium </li></ul><ul><li>Risk diversification </li></ul><ul><li>(In)efficiencies in financial markets, Asset pricing </li></ul><ul><li>Horizon </li></ul>Investment process beliefs <ul><li>Impact, focus on management decisions </li></ul><ul><li>Risk management </li></ul><ul><li>Investment management style </li></ul><ul><li>Costs </li></ul>Sustainability and Governance <ul><li>Sustainability and Corporate Governance in asset pricing </li></ul><ul><li>Role in investment process </li></ul>Organizational beliefs <ul><li>Teams, role of investment managers </li></ul><ul><li>Out vs. insourcing </li></ul><ul><li>Experience </li></ul>
    11. 11. PGGM c apitalize on our strength as a long-term investor. […] We can select investments which generate a high return in the long term, even though they may suffer short term losses.”
    12. 12. PensionDanmark According to PensionDanmark, “the best investment results are most likely to be achieved with a relatively small and focused investment team combined with a high degree of outsourcing to external managers.”
    13. 13. OTPP “ managing investment risk is just as important as generating returns. Maintaining a well-diversified portfolio is the cornerstone of the Fund's risk management program.”
    14. 14. ABN Amro Expects over the longer term to see ”the majority of value added come from stock selection as this normally represents a more stable and consistent source of out-performance.”
    15. 15. Some beliefs are more equal…
    16. 16. Differences in pension funds and asset managers Pension fund Asset manager <ul><ul><li>Risk diversification </li></ul></ul><ul><ul><li>Risk premiums </li></ul></ul><ul><ul><li>Responsible Investments </li></ul></ul><ul><ul><li>Goals </li></ul></ul><ul><ul><li>Inefficiencies </li></ul></ul><ul><ul><li>Active management </li></ul></ul><ul><ul><li>Teams and staff </li></ul></ul><ul><ul><li>Focus </li></ul></ul><ul><ul><li>Impact </li></ul></ul><ul><ul><li>Risk man. </li></ul></ul>
    17. 17. Relationships between beliefs <ul><li>Weak relationships expected and found: suggests sensible thought-out processes </li></ul><ul><li>Some relationships show up, suggesting </li></ul><ul><ul><li>Organizations which hold beliefs about where their added value is, tend to apply it in the investment process. </li></ul></ul><ul><ul><li>The impact of lower costs becomes more visible with a longer time horizon. </li></ul></ul><ul><ul><li>Beliefs about risk diversification and inefficiencies are in some cases passed on to the external managers that pension funds select. </li></ul></ul><ul><ul><li>On the other hand, pension funds with beliefs about in- and outsourcing are more focused on the organizations goals and pension liabilities. </li></ul></ul><ul><ul><li>Some organizations consider risk premia in a broader setting </li></ul></ul>
    18. 18. Forging a link Performance measures Expense ratio Costs Information ratio Alpha Investment Management Style 3, 5, 8 years periods Horizon Asset diversification Return-risk ratio Risk diversification
    19. 19. Descriptives… Pension funds create alpha Are well diversified
    20. 20. … Pension funds create high return/risk and report lower costs
    21. 21. Links exist <ul><li>Between several investment beliefs and structural performance measures. </li></ul><ul><ul><li>Organization with investment beliefs on risk diversification also show better return-risk performance measures, but also lower costs. Focus pays off. </li></ul></ul><ul><ul><li>Funds that hold a clear view on how risk management is organized, usually in combination with a view on the management style, realize higher alpha and return/risk ratio’s than funds that do not hold such views. </li></ul></ul>
    22. 22. Some caveats <ul><li>Small sample, yet the broadest so far </li></ul><ul><li>Performance measures are relatively crude, managers might have other performance measures in mind </li></ul><ul><li>We’ve collected the explicit reported ones, what about the non-reported implicit ones? Every pension fund holds them per definition. </li></ul>
    23. 23. Summarizing <ul><li>Investment beliefs: still relatively unexplored? </li></ul><ul><ul><li>Developing a set of investment beliefs makes sense from a strategic perspective: an organization has to identify where and how it does add value to the investment process. </li></ul></ul><ul><li>Structure emerges </li></ul><ul><ul><li>Beliefs about the financial markets, investment process, organization, and sustainability and corporate governance. </li></ul></ul>
    24. 24. <ul><li>Pension funds and asset managers differ </li></ul><ul><ul><li>A pension fund focuses on risk diversification, getting its beta right. </li></ul></ul><ul><ul><li>An asset manager stresses the role of risk management and argues for a particular investment style. Asset managers emphasize the quality of their organization. </li></ul></ul><ul><li>Promising link between beliefs and performance </li></ul><ul><ul><li>An organization with investment beliefs on risk diversification shows better return-risk performance, but also lower costs. </li></ul></ul><ul><ul><li>Funds that hold a clear view on how risk management is organized, usually in combination with a view on the management style, realize higher alpha and return/risk ratio’s than funds that do not hold such views. </li></ul></ul><ul><ul><li>Investment beliefs framework helps focus investment strategy, governance and results </li></ul></ul>

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