Penny Green, chief executive of The Saul Trustee Company - responsible for Superannuation Arrangements of the University of London - has labelled the failure of pension schemes to adopt modern portfolio diversification theory "a damning indictment of UK trustees and consultants".
The head of the £1.04 billion scheme made the remarks while participating in a panel discussion at a seminar hosted by Fathom Financial Consultants and Gatemore Capital Management on the benefits of diversification in pension fund portfolios held this morning.
Green's criticism came in response to an audience member stating that the seminar's topics were based on the classic paper by economist Harry Markowitz, first published in 1952, rather than representing a significant advance in diversification theory
Green, however, cautioned against over-reliance on Markowitz's theory, saying: "It should not be followed blindly. Just diversifying across asset class did not significantly help to reduce risk. Because most assets were leveraged, everything simply correlated to one."
Mark Hodgson, managing director of Gatemore, had in an earlier presentation stressed the benefits of diversification, but in the panel discussion he mounted a defence of UK schemes' traditional 80% equity holdings.
This prompted one audience member to ask why talking about diversifying interest rate and inflation risk was not then applied to equity risk. Both Hodgson and Green argued that such a large equity allocation could constitute a diversified portfolio, if a fund took a long-term view that equities were sufficiently undervalued.
Liad Meidar, managing partner at Gatemore, cited the endowment of Connecticut-based Yale University as an example of a well-diversified fund. This was met with incredulity by other audience members, one of whom said: "We saw in 2008 and 2009 how diversification didn't work. I can't believe I've heard a defence of the Yale model today. It's ridiculous."
Meidar responded that although the endowment had seen its strategy perform badly "over a short time horizon", it would "absolutely not" change it.
The university's endowment, whose model was designed by former Lehman Brothers banker and investment guru David Swensen, who has been an advocate of Markowitz's theory, posted a 25% loss in the year ended June 30.
Andrew Clare, professor of asset management at Cass business school and chairman of Fathom, who chaired the panel discussion, said he had not seen as heated a response at such events.
The week on Risk.net, July 14–20, 2017Receive this by email