Slow and steady wins the race at one pension scheme. Louise Farrand finds out more
When you could have to prop up an underfunded pension scheme, you start paying attention.
At least, that is what happened to Lombard Odier’s six partners.
The asset management firm’s headquarters are in Switzerland, where the local regulator enforces a strict funding regime. Whenever a Swiss pension scheme’s funding ratio falls below 100%, the regulator will approach sponsors and caution them that they must plug the gap.
Faced with the prospect of pumping millions of pounds of their own money into the pension scheme, the partners took action. “In 2008 the board took a big, dangerous decision to cut risk to protect the coverage ratio in the middle of the crisis,” relates Aurele Storno, the chief investment officer of Lombard Odier’s pension scheme.
The scheme protected equity risk and progressively decreased allocations to other risky assets, such as hedge funds, in favour of short term investments.
When markets tanked, the scheme’s investments took an upturn. “The big difference between now and then is today it is supposed to be more controlled and more regular. You will see that with our new strategy,” says Storno.
The trustees are not aiming to shoot the lights out”
Since the board’s review, the investment returns have been consistently cash plus 3.5%. The trustees are not aiming to shoot the lights out. “To be honest, when we are asked to make a forecast, we think over the next five or ten years [of] something more like cash plus 2%,” says Storno.
The secret to such smooth returns is diversification. Storno explains: “If you are the pilot of the plane and want to have less turbulence, maybe you are going to go a bit slower and be 15 minutes late, but nobody is sick and the pressure is much lower. So you really focus on flying smoothly and in other words, that means smooth returns.”
Not everyone understands diversification, argues Storno. “People think that if you put 50% bonds and 50% equities in a portfolio it is diversified. No it’s not.”
He cautions against buying an index and assuming it automatically gives you diversification. “Because you buy MSCI World, you expect it to be a diversified equity basket – actually it’s 60% US. Why do you buy 60% US?… Because everyone is doing it? Are you comfortable with this?”
Oh God, we lost so much money, we should cut risk”
Instead the scheme looked at “interesting markets” which can get overlooked.
The board also tries to make active, clear-headed decisions. Storno uses the word “non-choice” when explaining what they try to avoid. “You want to be protected from your reactions when there is a stress. Because usually we react badly like ‘Oh God, we lost so much money, we should cut risk’. And then you cut risk at the bottom.”
Storno also cautions against groupthink. “Because the community or the consultant tells you that to have a default you use this and that, you make a non-choice and end up being concentrated.”
You make a non-choice and end up being concentrated”
He continues: “The art is about managing the risk linked to each component of the portfolio and not having a view – ‘We believe this one will move up faster’ – because most of the time, quite frankly, 50% of the people are right and 50% of the people are wrong.”
Storno and his team also try to look for value, rather than becoming preoccupied with cost. “We’re not saying that it’s good to pay 2%. But we believe it is good to be active rather than passive. You are paying for better results, not paying for paying’s sake.”