Investment Beliefs

1. Investment Beliefs Kees Koedijk, University of Tilburg Alfred Slager, PGGM Investments / RSM Erasmus University

2. What makes an investor great? • Investment management • Investment managers need an investment process in sync with theory (Damodaran 2007) • Upward potential for good governed pension funds (Ambachtsheer 2007), best governed pension funds focus on coherence, process and people (Roger and Urwin 2007) • Strategic management: • Identifying core competences, aligning organization • Common thread: focused investment beliefs

3. Focus on investment beliefs • Why not? • Companies have to articulate their unique selling proposition for their client(s) • Especially in financial markets where different visions co-exist • If not • It becomes difficult for trustees to evaluate new developments, and whether to embed them in their own strategies • More likely to “join the herd”, increasing costs and opportunity costs along the way

4. Vanguard ''consistently outperforming the financial markets is extremely difficult''.

5. Research set up • Our paper investigates • What investment beliefs are out there • How do investment beliefs of pension funds and asset managers differ • Can we say something about their link to performance • Data collection • Web site, (annual) report, presentations collections • Focus on largest asset managers and pension funds • Scope: publicly reported beliefs (the explicit ones)

6. Theory behind investment belief Investment Belief Theory Investment Strategy Organization

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. From beliefs to philosophy Investment philosophy Coherent set of beliefs … =

9. Sample: 23 pension funds and 17 asset managers

10. 4 groups of investment beliefs Financial Markets beliefs Investment process beliefs • Risk premium • Risk diversification • (In)efficiencies in financial markets, Asset pricing • Horizon • Impact, focus on management decisions • Risk management • Investment management style • Costs Organizational beliefs Sustainability and Governance • Teams, role of investment managers • Out vs. insourcing • Experience • Sustainability and Corporate Governance in asset pricing • Role in investment process

11. PGGM capitalize 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. 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. 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. 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. Some beliefs are more equal…

16. Differences in pension funds and asset managers Pension fund Asset manager • Risk diversification • Risk premiums • Responsible Investments • Goals • Inefficiencies • Active management • Teams and staff • Focus • Impact • Risk man.

17. Relationships between beliefs • Weak relationships expected and found: suggests sensible thought-out processes • Some relationships show up, suggesting • Organizations which hold beliefs about where their added value is, tend to apply it in the investment process. • The impact of lower costs becomes more visible with a longer time horizon. • Beliefs about risk diversification and inefficiencies are in some cases passed on to the external managers that pension funds select. • On the other hand, pension funds with beliefs about in- and outsourcing are more focused on the organizations goals and pension liabilities. • Some organizations consider risk premia in a broader setting

18. Forging a link Performance measures

19. Descriptives… Pension funds create alpha Are well diversified

20. … and report lower costs Pension funds create high return/risk

21. Links exist • Between several investment beliefs and structural performance measures. • Organization with investment beliefs on risk diversification also show better return-risk performance measures, but also lower costs. Focus pays off. • 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.

22. Some caveats • Small sample, yet the broadest so far • Performance measures are relatively crude, managers might have other performance measures in mind • We’ve collected the explicit reported ones, what about the non-reported implicit ones? Every pension fund holds them per definition.

23. Summarizing 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. Structure emerges • Beliefs about the financial markets, investment process, organization, and sustainability and corporate governance.

24. Pension funds and asset managers differ • A pension fund focuses on risk diversification, getting its beta right. • An asset manager stresses the role of risk management and argues for a particular investment style. 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. • Investment beliefs framework helps focus investment strategy, governance and results