Bank of Ireland’s IT director for pensions says regulations are killing liberal economies

“I wouldn’t dare tell a business how it should be run, they are the experts. Rather than telling a board of directors how to behave, I would rather they were in competition, ”says Paul Droop, IT director of group pensions at the Bank of Ireland, who believes regulation is hurting competition on the free market in a disturbing new change that poses the greatest risk for investors.

This old photograph taken in the early 20th century of a horse and cart next to one of Henry Ford’s first carriages is often used today to depict the seismic energy transition to come as the world goes by from gasoline and diesel to electric cars. But this hides a crucial difference. The first cars were a consequence of market induced change – no one told people to buy them. Today, new rules decree that people can no longer drive gasoline cars, discouraging investment in the companies that make them.

Leaving aside value judgments and not expressing a perspective on the climate emergency, it is this emerging and disturbing shift from liberal market economies to centrally planned and regulated economies that poses the greatest risk for investors, says Paul Droop, CIO of collective pensions. to the Band of Ireland, overseeing the € 7 billion Bank of Ireland Staff Pension Fund (BSPF).

“We are witnessing a growing distance from liberal markets, encouraged and driven by a growing range of sources. On a spectrum from very open and liberal market economies to another extreme of centralized planning, the world appears to be moving significantly towards centralized planning and control, ”he said in an interview at the fund’s headquarters. at Dublin.

This is not only visible in increasingly pervasive climate regulation. The pandemic has accelerated the trend, ushering in unprecedented rules and restrictions in response to COVID, many of which have yet to be removed.

“Permanent rules have emerged regarding what we can and cannot do; how we behave and how we interact with each other.

And it’s not just governments and regulators who are driving change. Asset owners and managers are also accelerating the trend, says Droop, particularly concerned about the growing role – and pressure – on shareholders to intervene in corporate governance.

“I wouldn’t dare tell a business how it should be run, they are the experts. Rather than telling a board how to behave, I would rather they compete.

Only this competition is increasingly hampered in a threatening context for BSPF’s portfolio exposed to the entire market and structured to face any type of risk. Droop’s risk management philosophy is virtually non-alpha, but rather emphasizes diversity and resilience. Listed markets should be a competitive ground where every buyer and seller can meet, he argues. This dynamism and health depend on the fact that the best companies get the most favorable access to capital and the worst ones are left out, but only on the rules that define what makes a good company skew the playing field.

“It should be an open competition where the best win and those who are not so good fail.”

Exposure to everything

Exposure to everything is vital in today’s uncertain world where investors cannot be sure what to expect.

“The information about the past is not even that good,” he says. Some investments go wrong, others prosper, but that’s competition within the capital market.

“For every failure, we are also on the winners,” he says. “We don’t filter anything. If we have diversity, the strategy will naturally benefit from any opportunity, without having to try to predict what it might be and take an explicit and specific risk to express that point of view.

It is a risk management strategy as suited to ESG as any other source of risk, today and historically.

“A market capitalization-based exposure to global listed equities would be superior to an approach that filters, tilts, holds assets according to arbitrary rules or is actively managed according to the manager’s views. Diversity as a risk management process should always work for any risk presented by ES or G issues if you think this is the case, for example, for global monetary policy.

Effective risk management should refer to the price of assets and securities, he adds. Yet if managing risk simply means, say, “buy wind turbines and sell coal mines” without reference to price, investors are not managing risk effectively. Especially in an environment like today where he says everyone seems to lean the same. “From a risk management perspective, this type of behavior causes people to buy overvalued assets and sell undervalued assets, which is not very good risk management.

Diversity wins

Since joining the fund in 2011, Droop has transformed asset allocation. It increased liability coverage, diversified asset classes and strengthened private market coverage with the BSPF allocation currently split between equities (13%), credit (23%), guaranteed income (7%) , real estate, infrastructure and absolute return (5 percent each) and liability coverage (42 percent)

A risk management philosophy that avoids alpha and champions diversity and resilience to mitigate uncertainty means it avoids all managers with highly focused or opportunistic approaches. It also spends less on fees.

“We tend to employ managers at the more ‘boring’ end of the scale. The total management fee for the entire portfolio is around 30 basis points, which includes very expensive private and hedge fund strategies. “

Droop, who manages the portfolio with an assistant and is responsible for thought leadership and idea generation, ties the success of the fund to this clear delineation and a willingness to do new things. In the six years leading up to December 2020, BSPF’s yield-seeking assets returned 7.6%. He also thanks the administrators and the governors for not having chased the fashions but for having remained faithful to a fundamental belief and a philosophy. And he doesn’t intend to change anything.

The fund’s liabilities are sufficiently hedged – if it were to continue to hedge, it fears losing benefits or risk diversification on margins – and it added two new credit strategies last year. Investment themes such as China or new technologies are already taken into account in the diversified approach which does not seek to select the winners.

This brings the conversation back to its central point. A portfolio designed to tap all parts of the economic value creation chain in a market economy where every investment behaves differently but each individual asset has a role to play, does not require much maintenance. Or at least until governments start to intervene.

“Shifting savings to centralized planning and control is a net loss for everyone. The market should be allowed to sort it out.

Sarah Rundell is a writer for Top1000funds.com based in London. She writes on institutional investing in all asset classes, global trade and corporate treasury.

Source link

About Christian M.

Check Also

USS makes Thames Water its biggest stake

The Universities Superannuation Scheme in London increased its stake in Thames Water, making it the …