The importance of knowing the errors in any measurement is not just critical for the pilots of low-flying planes. It has a fundamental importance in the management of financial assets and liabilities, and it appears to have been ignored often.The reason for this is quite simply that, whilst experimental physicists can claim to have a deep knowledge of mathematics (two-thirds of my first-year lectures were in mathematics), much of the application of mathematical techniques to finance has been undertaken by mathematicians for whom the whole idea of error margins appears to be an alien concept. The effects can be seen throughout the financial world.For pension funds, the effects of this can be seen in the way a mathematician and an experimental physicist might approach a typical problem such as calculating a liability-driven investment (LDI) strategy. Typically, an actuary with a pure mathematics background would state that, as of the moment of calculation, the liabilities are precisely £1,543,456,000 based on his models, and this value changes by the minute in the light of market movements in government bonds. Asset allocation decisions in the form of precisely matching cashflows should be based on this and continuously rebalanced in the light of any mismatches that appear with time. This would lead to frequent rebalancing decisions, with all the costs that would entail.A physicist, on the other hand, would come up with the answer that the best estimate for liabilities is a figure of £1.5bn, plus or minus £100m, reflecting factors such as uncertainties in mortality rates, the appropriate risk-free government bond yield and so on. The figure, together with the error associated with it, should be the basis on which asset allocation and any hedging decisions are made. Moreover, this figure and the error associated with it are likely to remain relatively stable, and so little rebalancing would be justified. Clearly, the financial and economic consequences of the two approaches are likely to be very different!The economic reality is there are large uncertainties in a valuation due to inherent uncertainties in the maturity profile of the pension liabilities, for example, and also in the actual future risk-free bond yields that are the basis for any form of discounting. Current government bond yields clearly do not represent an unbiased estimate for future government bond returns, with the effects of quantitative easing and the artificial demand stimulated by the effect of rigid LDI approaches to matching. Using government bond yields to discount pension fund liabilities may be useful for accountants and as a shorthand, but the calculated discounted value of the liabilities represents an estimate not an absolute truth.The reality is that any economic valuation of a pension fund’s liabilities has an error margin built into it. The size of that is of critical importance since it effectively determines whether expensive approaches using risk-free government bond portfolios to match liabilities make any sense at all. If error margins in liabilities are large, then adopting an approach of approximate matching using asset classes such as equities and other assets aimed at producing high long-term absolute returns with given levels of risk may be more sensible than investing in bonds with precise cashflows to match liabilities with much more imprecise cashflows. Investors may be better off even in an LDI context, with approximate matches that are cheap, than purchasing expensive and precisely tailored cashflows via sovereign debt to match liability streams that are themselves only imperfectly defined. This is particularly so when core euro-zone bonds are offering negative yields.Unless there is a proper appreciation of error margins in the valuations of assets and liabilities, pensions funds may be like the pilot of the low-flying plane at night who has been given some measurements of the buildings he is flying over but no has appreciation of the error margins in the heights. Perhaps it is time for the mathematicians to move aside and let the experimental physicists take the lead in applying mathematics to an imperfect world!Joseph Mariathasan is contributing editor at IPE The importance of knowing the errors in any measurement is not just critical for the pilots of low-flying planes, Joseph Mariathasan warnsMathematics lies at the heart of modern finance and its applications to investment. But there is a fundamental difference between the way pure mathematicians would approach the use of mathematical models to describe the world outside the lecture theatre and the approach adopted by physicists.Many of the current ills of the financial market can be placed at the doors of the mathematicians who tried to apply mathematical rigour to the financial world, assuming the same success could be achieved as that seen in the physical world. The errors of this have been described very well in books such as The Black Swan by Nassim Nicholas Taleb.One of the clearest things I still remember from my undergraduate lectures in experimental physics is that, when it comes to the measurement of any quantity, the estimate of the error associated with the measurement is just as important as the measurement itself. In simple terms, if you measure the height of a building as 34.5 metres, it is as important to know whether the error in the measurement is plus or minus 20 meters or plus or minus 0.2 meters.
It warned, however, that more detailed government control of investment procedures – by the introduction of the new board, which would see a principal granted ownership of all assets – could compromise the funds’ freedom.The bank’s comments came after the four main AP funds claimed the system’s overhaul ran the risk of “political micromanagement”.The bank also argued that too narrow a focus on costs could hamper the system’s ability to invest in unlisted assets, and that the funds should not be forced to sell assets too quickly.It said any sale of assets should be gradual, arguing that, if any reallocation were conducted slowly, it would not risk financial stability – an area the bank is responsible for monitoring.AP6, in its own response to the consultation, backed the shift to a prudent-person approach.It said the removal of the quantitative investment rules governing the funds to date could increase the freedom to pursue investments providing better risk-adjusted returns.The fund also agreed with the idea of greater collaboration among AP funds on unlisted asset holdings, and backed collaboration that would go through a single centre of competence based at one of the remaining AP funds.It suggested the funds could coordinate their investment activity by establishing a joint investment committee, and called for the expertise built up over the last 20 years at AP6 to be fully utilised when establishing the new unlisted team at AP2. Sweden’s central bank has warned that the government’s proposed overhaul of the AP buffer fund system could hinder their ability to invest in infrastructure and real estate.The intervention by Riksbank came as AP6, devoted to private equity investments and set to be merged with AP2 under the reform proposals, called for its 20 years of “expertise” to be appreciated as operations transferred to the other buffer fund.Riksbank backed large parts of the proposals, drafted by the cross-party Pensionsgruppen, and said the establishment of a National Pension Fund Board to oversee the system was justified.It also conceded that deciding on benchmarks against which to measure performance and setting risk targets might be warranted.
He added that the new rules seemed to be “giving with one hand and taking with the other”, and that it was “pretty unprecedented” the government would have the power over investments.Clifford Sims, a partner at Squire Patton Boggs, said the new powers should be regarded as a way of granting the DCLG a carrot and stick with which to ensure the pooling of assets.He praised the way in which the new regulations were drafted and said he expected the ability of the government to intervene was likely to be reserved for funds unwilling to pool assets.Pointing to the consultation document that said the government would be able to intervene where an administering authority was “carrying out another pension-related function poorly”, Sims speculated that intervention would not be limited to investment decisions.“I think it is not just pooling, I think it is poor performance,” he said. “If they think someone is a sickly child, they will intervene.”Delderfield noted that The Pensions Regulator did not currently have the powers to direct investment.Instead, with schemes where it has concerns over aspects of management, it is able to replace one or all of the trustees.However, Jae Fassam, a senior associate at Pinsent Masons, said the change was in line with the rules governing private sector schemes, with a move towards a principles-based regulatory framework.“There has never been a power for the secretary of state to intervene in this way before, but, with the [previous] 2009 regulations, he already had intervened – he had just done so prior to publishing them,” he said. The only one of the English pooling proposals to so far meet the £25bn threshold is the London collective investment vehicle, which earlier this week announced the names of four managers in charge of £6bn in mandates. New rules allowing the UK government to control investments made by local authority funds are “unprecedented”, going beyond the influence The Pensions Regulator exerts over private sector schemes.Unveiled as part of the Department for Communities and Local Government’s (DCLG) legislative backstop to ensure local government pension schemes (LGPS) pool assets into up to six vehicles no smaller than £25bn (€35.5bn), the regulation also removed the current statutory investment rules, instead requiring an investment strategy statement be drafted that allows investments as long as they are prudent.Joanne Segars, chief executive of the Pensions and Lifetime Savings Association, welcomed aspects of the new regulation and praised the shift to the prudent person model, saying the association had long backed such a change. However, Gary Delderfield, a partner at law firm Eversheds, said the new regulation seemed “pretty unique”, as it allowed the secretary of state for communities – currently Greg Clark – to amend a fund’s investment strategy statement and direct investment in specific assets.
State Street Global Advisors – Adam Grainger has been appointed COO of the European defined contribution business. Over the last six years, he has worked for JP Morgan Asset Management and BlackRock, among others. Based in London, he will be looking to expand State Street’s DC operations in Ireland and across Continental Europe.European Central Bank – The ECB is hiring a head of division for bond market and international operations. The new hire will be responsible for contributing to the management of the ECB’s pension funds, among other things. The position is in the Directorate General Market Operations, with applications open until 15 June. Auriel Capital – The UK-based institutional asset management firm has appointed Antti Savilaakso as a partner. Savilaakso joins from MSCI, where he was head of ESG research for EMEA. Before then, he worked in ESG analysis and portfolio management for more than 10 years at Nordea Asset Management.CFA Institute – Colin McLean has been elected vice-chair of the board of governors of the global association of investment management professionals. Effective 1 September, he will succeed Frederic Lebel, who will become the elected chair of the board. McLean is the first non-Charterholder to hold the role of vice-chair. He is chief executive at SVM Asset Management, a fund management group based in Edinburgh.Invesco Perpetual – Thomas Moore has been appointed to the investment manager’s Henley fixed interest investment team. He joins from Morgan Stanley & Co, where he was managing director and head of European credit analytics. Moore was at Morgan Stanley for 12 years, having been at Orion Consultants in New York before then.Savills Investment Management – James Bury has been named chief executive of the company’s European business, reporting to global chief executive Justin O’Connor. Bury was previously the manager’s COO, a role that also saw him sit on its management board.International Property Security Exchange – Robert Bould has been named non-executive director of the London-based exchange. Bould was previously chief executive of GVA Bilfinger and executive vice-president of Bilfinger Real Estate in Germany. KPA Pension, Nordea, Amundi, State Street Global Advisors, European Central Bank, Auriel Capital, MSCI, CFA Institute, Invesco Perpetual, Morgan Stanley & Co, Savills Investment Management, International Property Security Exchange, GVA BilfingerKPA Pension – Britta Burreau has been named chief executive of the Swedish pension provider, filling the vacancy left last year following Erik Thedéen’s decision to join the country’s regulator, Finansinspektionen. Burreau, who has been chief executive of Nordea Liv & Pension Sweden since 2004, will join in December. Johan Nystedt, currently CFO at Nordea Liv & Pension, will succeed Burreau as chief executive from June.Amundi – The France-based asset manager has created a global advisory board. Hubert Védrine, former foreign affairs minister of France, will chair the board, which will also include the following people:Helen Alexander, former president of the Confederation of British IndustrySimon Fraser, former permanent secretary at the Foreign and Commonwealth OfficeEnrico Letta, former prime minister of ItalyMaurice Levy, chairman and chief executive at Publicis GroupePatrick Ponsolle, former vice-chairman at Morgan Stanley InternationalJurgen Stark, former member of the executive board and governing Council of the ECBIsabel Tocino Biscarolasaga, former minister of the environment in SpainTatsuo Yamasaki, former vice-minister of finance for Japan
Legal & General – L&G’s Pension Risk Transfer business has appointed Ashu Bhargava as a director in strategic transactions. Bhargava’s last role was as a senior consultant within Willis Towers Watson’s pensions advisory business. He began his career as a trainee actuary at Clay and Partners.bfinance – The investment consultancy has appointed Joey Alcock as senior associate in its public markets team, specialising in equities. He joins from Australian investment consultancy Frontier, where he has worked as a consultant for the last 11 years.Global Impact Investing Network – Peter Malik has been appointed director of membership. He joins from the Nature Conservancy, where he served as managing director for corporate engagements. The GIIN is a non-profit organisation dedicated to increasing the scale and effectiveness of impact investing.IFM Investors – Chris Newton has been appointed executive director for responsible investment. He joins from Australian Post, where he was head of social innovation and development. AP4, Mercer, Nestlé, Hermes Investment Management, Legal & General, Willis Towers Watson, bfinance, Global Impact Investing Network, IFM InvestorsAP4 – Niklas Ekvall has been named chief executive, succeeding Mats Andersson, who is stepping down after a decade in the role. Ekvall, who will join the SEK310bn (€33.2bn) Swedish buffer fund at the beginning of October, has held senior positions across the finance industry and academia, having taught finance at the Stockholm School of Economics. The incoming chief executive also spent five years as deputy chief executive and CIO of AP3.Mercer – Bettina Nürk, formerly responsible for Nestlé’s pension funds in Germany, is to lead a new division within the consultancy. Nürk, who was responsible for investment management and employee benefits while at the Swiss food company, began her new role at Mercer at the beginning of the month. She is to lead its newly launched consultancy for Pensionsfonds.Hermes Investment Management – Carl Short has been appointed director of engagement at Hermes EOS. Prior to joining Hermes EOS, Short worked for a number of banks and other research providers, including Standard & Poor’s Equity Research, Société Générale, Nomura and Kleinwort Benson.
Engaging with companies over environmental and ethical matters is a more sustainable strategy than simply dumping the investments, reported the Ethical Council for Sweden’s AP funds.Releasing its annual report for 2016, the advisory body said human rights, biodiversity, and anti-corruption remained areas of focus in its work last year, and singled out talks over the Thai fishing industry and Qatar’s foreign workers as examples.Peter Lundkvist, senior strategist and head of corporate governance at AP3 as well chairman of the Ethical Council in 2017, said: “The Ethical Council has during the past 10 years worked with engagement as a means to solve problems and incidents that occur in business operations of investee companies. It is a sustainable strategy instead of selling the companies.”Initially, remaining as owners and working for improvements had been a bit of a unique approach from the council, he told IPE – but it had since evolved “to become the standard for responsible investors.” “We think it’s much better to stay on as an investor as long as you possibly can,” Lundkvist said.“Of course you always come to some point in time when you feel it is meaningless, when the company isn’t listening to you,” he said.The Ethical Council has a four-year process, and if dialogue gives no results within that time, then the investment is sold.Sometimes divestment happens after a shorter period of attempting to engage, however, he said, citing the example of a Chinese mining company that did not respond to any of the council’s attempts to communicate.However, most of the divestments made by AP1, AP2, AP3, or AP4 are decided upon without input from the council, Lundkvist said, because they do not fulfil the funds’ investment criteria on financial grounds or fall short of sustainability standards set by the funds.Based on the mandate of the four main AP funds, the Ethical Council carries out both preventive and reactive work with portfolio companies, with the goal of having a positive effect regarding environmental and ethical issues.As an example of this work, it said it was engaged in a large number of dialogues on forced labour and child labour in the cocoa and tobacco industries.
Philippe Zaouati, CEO of Mirova, said: “We strongly believe that natural capital is the next frontier of impact investment and both specialist skills and a critical size are required to successfully address this nascent but promising market.”Flurry of sustainable fund launchesThis week has seen a number of asset managers launching products with a sustainable or responsible investment tilt.Fidelity International launched a global equity fund targeting companies with the highest ratings for environmental, social, and governance (ESG) factors. The Fidelity FIRST ESG All Country World fund also screens out companies involved in the manufacture or distribution of alcohol, weapons, firearms, tobacco, gambling, and adult entertainment. Steve Edgley, head of institutional for continental Europe at Fidelity, said: “As the regulatory environment continues to evolve and investors look to invest responsibly, many of our clients are looking for innovative and robust approaches to enable them to implement ESG portfolios while continuing to achieve their risk adjusted return objectives. We have designed the Fidelity FIRST ESG approach specifically to allow clients to achieve these two goals.”Meanwhile, Candriam Investors Group launched a range of exchange-traded funds (ETFs) combining ESG screening and smart beta factors. The five ETFs – launched under Candriam’s indexIQ brand – cover European, euro-zone, and Japanese equity indices, and euro-denominated sovereign and corporate bond indices. They are listed on the Paris Euronext Stock Exchange and the Amsterdam exchange, and are registered in Luxembourg, the Netherlands, and France.Specialist emerging markets manager East Capital has launched a Sustainable Emerging Markets fund, coinciding with the company’s 20-year anniversary. The fund is managed by CIO Peter Elam Håkansson and has been seeded with investments from Nordic institutional investors.East Capital said the fund would target “companies characterised by high growth potential and strong ESG profiles, with a clear overweight in themes relating to domestic growth and the emerging consumer”. It will specifically look for opportunities in renewable and clean technologies, and will invest in frontier markets and Chinese A-Shares.River & Mercantile takes on EM teamCredit Suisse Asset Management’s emerging markets team is to transfer to UK fund and fiduciary manager River & Mercantile Group.The Swiss firm’s emerging markets “industrial life cycle team”, led by Al Bryant and Todd Leigh, transferred this week. The team manages $360m (€315.6m) in equity strategies.Filippo Rima, head of equities at Credit Suisse Asset Management, said the move was “an integral part of our focus and specialisation strategy”. James Barham, head of asset management at River & Mercantile, said it was “a significant step forward in the continued development of the group’s equity franchise”, as it will bring in Luxembourg-based strategies and products for US clients.As of this week, the funds have transferred to River & Mercantile initially under an investment advisory agreement. Subject to regulatory approval, the Luxembourg funds will transfer fully to River & Mercantile and be rebranded. Mirova, the responsible investment affiliate of Natixis Global Asset Management, has entered into exclusive negotiations to buy a majority equity interest in London-based impact investment manager Athelia Ecosphere.The targeted acquisition is intended to create a European platform offering investment opportunities addressing major global environmental challenges such as climate change, protection of landscapes, biodiversity, and soil and marine resources.Created in 2012, Athelia is involved in financing sustainable land use, biodiversity, and ecosystem-based climate activities, with an emphasis on “blended value” investments. It has raised and partly deployed a fund aiming to invest in carbon emission reduction projects in the forestry sector that generate carbon credits in Africa, Asia, and Latin America, with commitments secured from “prominent private and public sector institutions”.Mirova has ambitions to become a leading sustainable alternative asset manager and said the acquisition of Athelia would be a major step forward in this regard. Since 2015 it has been working alongside the UN Convention to Combat Desertification to launch a Land Degradation Neutrality fund, a public-private vehicle that intends to invest in profit-generating sustainable land management and restoration projects worldwide.
Source: Stephen CodringtonSeparately, AP4 has finalised the sale of more than 20 coal stocks from its global equities portfolio.The fund said the divestment had reduced its carbon footprint to around 57% that of a broad global equities index.The coal firms excised from the portfolio are those whose thermal coal activities make up 20% or more of turnover, the fund said.AP4 last year began allocating more money to low-carbon equity strategies in an effort to reduce the fund’s climate risk. “This is experience that we are looking for going forward, now that we are getting an increased and broader investment mandate.” AP4’s CEO Niklas Ekvall with new head of alternatives Jenny RuudAskfelt Ruud will replace Tobias Fransson, who has been working in a more generalist role within the fund for the last year, focusing on strategy, sustainability and communication.Fransson said the recruitment process for his successor had taken some time due to the uncertainties about the new investment guidelines.The other three main buffer funds – AP1, AP2 and AP3 – all have alternative investment units and heads of unit in place.AP1’s Martin Källström, however, is set to leave the pension fund to join Swedish hedge fund Lynx, according to a report from news service HedgeNordic.AP2’s head of alternatives is Anders Strömblad, while Bengt Hellström heads up AP3’s alternatives operation, with both men having been at their respective pension funds for many years.Changes afootCurrently, the AP funds can only make unlisted investments through externally managed funds.Subject to parliamentary approval, the funds will be granted permission to make additional allocations to illiquid asset classes from 1 January 2019. From 1 July 2019, the funds will be allowed to invest in unlisted instruments directly, including private equity and real estate.The bill on the new investment guidelines was presented to Sweden’s parliament yesterday, but legislators voted to delay the debate until October.AP4 dumps coal stocks Sweden’s AP4 has hired a new head of alternative investments in preparation for its revised investment guidelines coming into force next year.Jenny Askfelt Ruud has been appointed by the SEK357bn (€34.4bn) fund with effect from September.AP4, one of the four large buffer funds backing Sweden’s state pension system, said Askfelt Ruud would gradually strengthen the fund’s alternatives team in order to take advantage of the revised guidelines.Niklas Ekvall, AP4’s chief executive and a vocal proponent of increasing direct investments, said: “Jenny has a long background in unlisted direct investments, long-term ownership and sustainability from… Ratos, McKinsey and Morgan Stanley.
Two wine fridges flank the kitchen island.The six bedroom, three bathroom, triple garage house was sold by Zora and Michael Liu of LJ Hooker Sunnybank Hills. The house last sold for $390,000 in 2006 and was built in 2005.It was marketed as a “spacious modern mansion” surrounded by high quality homes in a highly desirable location. 373 Swann Road, St Lucia Qld 4067SOME homes just have it, that certain ‘x’ factor that sees them change hands with relative ease when others may struggle, like the top two sales landed in QLD this weekend.A five-bedroom house in Brisbane university suburb St Lucia fetched the highest price of all houses that were on sale across the state this week, according to latest CoreLogic data.The home at 373 Swann Road was sold for $1.7m by Caroline Munro Property. Loads of room to move with friends over.The outdoor entertainment space fits both a dining and sitting set and has in-built speakers, a mountable television, dimmable downlights and a gas outlet for the external kitchen.The property also has a large concrete street entry that can take six vehicles for off-street parking or make a good area for basketball. FOLLOW SOPHIE FOSTER ON FACEBOOK The home was billed as being perfect for those wanting to be close to UQ. The home that $5.6m can’t buy TV personality’s dream home up for rent More from newsParks and wildlife the new lust-haves post coronavirus17 hours agoNoosa’s best beachfront penthouse is about to hit the market17 hours ago Pizza restaurant owner selling slice of New Farm CoreLogic records show the home was being resold just a year and a half after it last changed hands, with the new owner landing a $110,000 discount on what the previous owner paid. The house last sold in 2006 for $390,000.It has two wine fridges under the kitchen island, a Vacuum Maid cleaning system, a laundry chute, an automatic chemical controller for the fuss-free pool maintenance, and multi-zone ducted airconditioning. The living room has 12ft high ceilings.An even larger home at 9 Ruby Close, Eight Mile Plains, was the second most expensive home sold during the week, fetching $1.458m.The home was said to considered lucky given “this property even has exactly 18 stairs in its staircase to ensure good feng shui”. The St Lucia home has an inground pool and lots of entertainment space.Agent Caroline Munro had marketed it as a landmark family residence with easy access to the University of Queensland.The home was on a 766 sqm block, and has five living areas, three bathrooms, one ensuite, a two-car garage, is fully fenced and has an inground swimming pool. The house has 12ft ceilings in its main living and dining rooms, with ornate plasterwork and elegant lighting.
Vendors Brian and Jane Riggall before the auction. The couple are downsizing. (AAP Image/Steve Pohlner)More from newsParks and wildlife the new lust-haves post coronavirus15 hours agoNoosa’s best beachfront penthouse is about to hit the market15 hours ago“They liked the fact it felt like a five-star resort in Phuket or Bali,” he said.“They have a family-owned company in PNG and children at university in Brisbane so wanted a Brisbane base.” 1. 110 Virginia Ave, Hawthorne $11.128m2. 27 Sutherland Ave, Ascot $11m3. 33 Moray St, New Farm $11.3m4. 33 Maxwell St, New Farm $8.5m5. 150 Adelaide Street East, Clayfield $7m6. 30 Windermere Rd, Hamilton $5.95m7. 17 Ningana St, Fig Tree Pocket $5.1m8. Welwyn Cres, Coorparoo $5.025m9. 127 Laurel Ave, Chelmer $5m10. 27 Sutton St, Chelmer $4.83 million 27 Sutton St at Chelmer has the full suite of luxury resort-style amenitiesA RIVERFRONT mansion at Chelmer has sold for $4.83 million – just one day after being passed in at auction.It is the second highest sales price achieved in the prestige suburb this year, with 127 Laurel Avenue selling for $5 million in February, according to CoreLogic.The sale has also landed the house in the top 10 Brisbane residential sales so far this year, with 27 Sutton St taking tenth position, knocking out 32 Teneriffe Drive at Teneriffe ($4.405mn). Mr Adcock said the buyer was drawn to the property due to its 34m absolute river frontage, tennis court, resort-style pool and studio kabana/guesthouse overlooking the river. The 27 Sutton St, Chelmer, property was inspired by the owners’ holiday memories.Jason Adcock of Adcock Prestige, who sold both Chelmer properties, said there were 10 registered bidders for the November 3 auction at 27 Sutton St, with bidding starting at $2.5 million and then stalling at $4.5 million. Mr Adcock said the other main player on auction day was a buyer who had relocated from Perth to Brisbane. Overall, he said the prestige market continued to fire in Brisbane. “There is a lot of activity in the prestige market and a lot of that is being driven by interstate and overseas buyers, and expats coming back home,” he said.“There is also strong interest from locals upgrading … I have a tonne of properties coming on to the market, with auctions scheduled right up until December 22.”*** TOP 10 BRISBANE RESIDENTIAL SALES OF 2018 “The new owner saw the house for the first time on the Friday (November 2) and was the highest registered bidder on the day,” he said.“Negotiations continued after the auction and the property was sold Sunday morning.”The luxury residence was featured on the cover of the October 27 edition of Courier Mail Realestate, and the story was seen online by the new owner. ORIGINAL STORY: Inspired by holiday memories