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The art of strategic thinking
Andrew Jackson uses some age-old wisdom to help pension fund trustees build a long-term
strategy
Armchair philosophers and self-help experts
have been rewriting the thoughts of Sun Tzu for
many years. Its simplicity and clarity of thought
coupled with its application to so many aspects
of our lives, make it an endless source of
inspiration. One theme, that of the value of long
term thinking and of devising a strategy, is the
most relevant for pension funds and perhaps
has rarely been more relevant than now.
“With a sound strategy, you will win. With a great
strategy, you will win without fighting”
Those readers who are pension fund trustees
or consultants I rarely envy. The decisions that
you face are complex, multifaceted and in most
instances well beyond my area of expertise
but in one regard I am deeply envious: your
mandate is by its nature long term.
Financial market practitioners find it easier
and more satisfying to focus on the immediate.
The analysis of technicals in markets, the
relationships between markets and the
immediate hit of measurement is intoxicating.
Meanwhile, evidence that there is significantly
less value to this approach than a medium and
longer term one, continues to accumulate. In
the October edition of Pensions Insight, Graham
Neilson, Cairn Capital’s Chief Investment
Strategist, discussed the benefits of seeking
value in relatively complex, less liquid and
stressed assets. The conclusion is that over the
long term these assets will “prove” their value
irrespective of the near term path. Thinking this
way is always challenging but current market
conditions make it even more so.
Current Challenges
We live in spectacularly unusual times. It is
difficult to overplay how unusual these times
are. The excellent “LT Asset Return Study: A
Journey into the Unknown” by Deutsche Bank’s
Jim Reid, Nick Burns and Stephen Stakhiv is a
must read in this regard.
Confidence and clarity of thought in times
of uncertainty are of even higher value. Almost
everywhere one looks, it appears that we are
in an uneasy equilibrium waiting for the next
major move. Credit markets, in particular,
are finely poised and look set for a period
of lower volatility but with an incredibly
uncertain medium term path. In times like
this the temptation to revert to what we find
comfortable, mean reversion thinking and the
“safe” strategy are almost overpowering.
“Appear weak when you
are strong and strong
when you are weak”
Spread to yield ratio vs long-term yield
Panning out and
examining the bigger
picture at times like
this can be invaluable.
Cairn Capital’s work with
pension funds in the UK,
Europe and the US over
the last four years has
proved to us that far from
being staid, stodgy or
sleepy organisations they
can be both progressive
and dynamic.
Self-Awareness
“Know yourself and you
will win all battles”
Pension funds have a
few major advantages:
long term horizon,
clarity of mandate, less
liquidity needed and fewer restrictions on their
investments. Cairn Capital is a credit asset
manager; we only do credit. You will therefore
not be surprised to hear me saying that pension
funds should look favourably on credit as an
asset class. Credit is an asset class where longer
term thinking adds significant value. We at
Cairn Capital prefer credit mandates that have
a relatively broad scope where the timing of
investment and divestment is at our discretion.
Most important of all however, is a clear
understanding of our mandate. In this regard,
communication and definition are vital.
One of our pension fund clients hosts a
strategy forum each year; all of their larger
managers are invited to attend. This forum
serves several purposes but in particular the
trustees and managers are encouraged to
critique the overall strategy. This may appear a
brave approach but, as one of their managers,
we believe it is very powerful. Each year we
leave knowing where our mandate fits into the
bigger picture and as a result, the quality of our
dialogue is materially enhanced.
Expert View
I have mentioned above some of the advantages
you have as pension fund investors, and it
would be unfair if I didn’t mention at least
one disadvantage. As trustees, managers and
advisors to pension funds you are exposed to
a major structural bias, that of limited upside
and almost unlimited downside when your
decisions are measured. With that in mind, it
would be tempting to hug consensus with a
view to “playing it safe”. The crowd may in most
instances be right, but a small deviation from
traditional thinking can have an outsized impact
on performance.
Deviating from traditional thinking I will close
with a prediction: Pension funds that play to
their strengths and focus on the longer term
horizon will outperform almost all other investor
types over the next three years.
“Strategy without tactics is the slowest
route to victory. Tactics without strategy
is the noise before defeat”
This information does not constitute investment research or an invitation or offer to buy or sell any investment and does not offer and should not be construed as
offering a research or investment recommendation. Any opinions expressed in this document reflect the judgment of the author at the date and time hereof and are
subject to change without notice.
31_CairnAdv_PINov12_311012.indd 1
Andrew Jackson,
C
Chief
Investment Officer,
Cairn Capital
November 2012 / PensionsInsight
31
www.pensions-insight.co.uk
31/10/2012 16:14