TABLE 3
FROM:
Best-practice pension fund governance
Gordon L Clark and Roger Urwin
BACK TO ARTICLETable 3. Investment value drivers
| Strategic allocation to equities and bonds | The strategic mix of equities and bonds over time allows some opportunity for added value | Within the range of all types of governance |
| Liability-driven investment | Hedging unrewarded risks, in particular interest rate and inflation risks, is a simple way to create value (essentially by avoiding destroying value) | |
| Use of alternative benchmarks/enhanced indices | This refers to the use of alternative benchmarks ('beta primes') which may have higher returns per unit risk than traditional capitalisation weighted benchmarks | |
| Strategic allocation to alternatives/absolute return mandates | Allocations to alternative assets should improve portfolio efficiency (contributing return and/or diversification) but carry heavy implementation and monitoring burdens | |
| Diversity in alpha selections/multiple active managers | This is a difficult area within which to add value, and value creation ideally requires large line-ups of managers with the attendant governance requirements | Within range of Type 3 governance funds |
| Diversity in beta selections/wider risk budget flexibility | Diversity in beta sources is deliberately targeting a more even exposure to a wide array of market return drivers which may be helped by using leverage and risk weighting | |
| Long-term mandates to capture skill term premium | This is about avoiding the efficiency costs of benchmark constraints and unnecessary costs of excessive short-term turnover, exploiting a 'discomfort premium' and sometimes using activism approaches | |
| Dynamic strategic allocations | Belief that asset classes can be temporarily expensive, or cheap, suggests a dynamic medium-term approach to asset allocation based on relatively frequent assessment of relative value |