Presentation at the European Pension Fund Investment Forum (EPFIF), September 4, 2012, The Hague. The presentation covers how unearthing investment beliefs helps improve investment governance, but poorly thought out or implemented investment beliefs challenge the organisation as well.

1. Setting the Scene
Challenging Investment Beliefs
The European Pension Fund Investment Forum
Alfred Slager, September 4 2012

2. Simple question
• What makes pension funds good investment managers
– Management literature: quest to be a good company
– Investment literature: similar approach until recently
• Recent developments
– Focus on investment process, choices embedded: investment beliefs
– Beliefs: set of high-level principles established by trustees to give them
focus ; assist effective internal decision making in complex environment.

3. Why we need to formulate beliefs
• Makes sense
– Companies have to articulate their unique proposition for client(s)
– Relevant in financial markets where different visions co-exist
– It concerns a lot of money, over a long period, and involves a lot of trust
• If not
– Difficult for trustees to evaluate new developments, and whether to
include them in their own strategies
– More likely to “join the herd”, increasing (opportunity) costs

4. What is an investment belief
Investment Belief Theory Investment Organization
Strategy
• Observes behavior in the financial marketplace
• Frames why the organization deals with this in a sophisticated way
• The term “belief” is a deliberate choice
– Investments not a hard science
– Theories put in practice yet untested
– Jargon - diversification, risk, long term horizon etc. mean different things to
different people.
• Trustees need a clear framework to make choices for a constructive dialogue with
stakeholders

5. Investment Beliefs in all sorts and shapes
• Financial Markets • Risk Management
– Risk Premium: Emerging vs. Mature
– LDI
markets
– Real risk
– Market timing
– Active vs. Passive
• Societal
– Diversification – Sustainability
• Organisational
– Costs
– Innovation
– Investment Process
– Investment Governance

6. Application of beliefs rather limited
• My assessment for the pension fund sector:
– 10% Formulate them and act on it
– 10% Formulate them
– 80% Do not formulate them but
• Copy behaviour from other organisations
• Outsource discussion to investment manager
• Sometimes afraid of consequences of making them implicit

7. Why we need to challenge
investment beliefs
All lined up to work in the participant’s interest, but let’s not forget
Trustees Status, reputation
Pension Fund Interesting job
Staff
Asset
Manager Be innovative, show skill

8. Challenges that cripple
• Beliefs system copied from leaders
• Beliefs based on results, not fundamentals
• Beliefs without acting on it
• Simplification
• (Too) high conviction beliefs

9. Beliefs should challenge organisation
• Funds invest and have implicit beliefs. Should be made
explicit.
• Are the beliefs evidence based?
• Whose belief is it? Who does it create work for? Is it
somebodies hobby?
• Are they implemented in the investment policy and
organisation?

10. Beliefs should challenge organisation
• Is there a culture to review them, and adjust if
necessary?
• Investment staff weary of less degrees of freedom
• Beliefs should reflect the governance and
complexity (and not add to it)

11. Alfred Slager
a.slager@tiasnimbas.edu
Read more on our work on investment beliefs
on www.investmentbeliefs.org