Although hefty investment losses by pension funds have alarmed the public and raised questions about risk exposure, funds should not dramatically alter their investment strategies, according to Zev Frishman, vice president of global equity strategies at the Ontario Teachers’ Pension Plan.
In a presentation in Toronto on Tuesday, Frishman said pension funds should remain focused on their long-term investment strategies. Extreme market events such as the recent financial crisis are unusual and unpredictable, and should not result in major strategic changes to asset management, he said.
“I’m not saying we haven’t done anything wrong, and perhaps there are a lot of things that can be improved in the pension management business,” Frishman said. “But I don’t think it really calls for extremely radical departures from what we’ve done before.”
Total assets at the Ontario Teachers’ Pension Plan plunged 18% in 2008, Frishman noted. But even taking this into account, the plan’s long-term real rate of return is 7.5%, he pointed out.
“2008 was a very, very difficult year,” he said, but added: “do I really have to do things differently if with 2008 in, I still ended up with a real rate of return of 7.5%?”
Frishman admits that in the current environment, it’s important for pension plans to assess their risk management practices. The Ontario Teachers’ Pension Plan has a stringent risk management process that is integrated into its investment division, he explained.
A fund’s risk management team should take into account the possibility of black swan events and worst-case scenarios, but managers should not let such possibilities dominate their investment strategy, he said.
Frishman added that many pension funds take risk management too far by implementing too many limits and adding too much diversification to their investment portfolios.
“Much of the pension universe is far over-diversified,” he said. While such cautious strategies protect funds in difficult market years such as 2008, they hamper strong long-run returns, he explained.
IE
Pension funds cautioned to stick with long-term investment strategies
Many funds take risk management too far, says OTPP’s Frishman
- By: Megan Harman
- May 5, 2009 May 5, 2009
- 13:15