Anne Cabot-Alletzhauser – Actuaries make the best money managers

 

This podcast is sponsored by Absa, a member of Barclays. Biznews’ Alec Hogg is with Anne Cabot-Alletzhauser, who was one of the panellists at the investment day that Absa put together. It was interesting, your discussions. Rob Rusconi, I never took him for a facilitator.

Oh, no, he’s a fantastic facilitator and he’s actually a very knowledgeable asset manager, even though he’s an actuary. The best asset managers are actuaries because they understand both the asset and the liability side. That is actually the secret of getting assets to do what you need them to do.

We live in a world of investing that’s being, massively misused. We’re thinking it’s all about ‘just give me the highest possible return’. The reality is asset management can be an incredible effective workhorse for you. If you can give it the right parameters and you can ask it to deliver me this, within X amount of time (and define those time), and you define how much variability you want around that target. In other words, how much certainty do you want?

That assuming that I can find some possible combination of assets out there that I can get there. I can do that job for you and we don’t ask asset managers to do that. We simply ask them to go – we ask Allan Gray to beat Coronation and Investec to beat, you know.

Just make me the most money you possibly can.

Make me the most money, which is a crazy idea because every time you do that. Every time you sort of say ‘let them do whatever they want to do’ – you add variability into the equation that takes you away from where you really should be going. Now, not everybody is ‘a goals-based’ type of a framework but if you look at almost all of the compulsory money that’s out there, Pension Fund money, any kind of retirement, annuity, or anything like that. All those or any kind strategy where someone has a very limited amount of money and has a very specific objective to that money. Those are all ‘goals based’ frameworks and they don’t live in the same kind of asset management world as a Coronation or an Investec – or just give me the best you possibly can.

Is this maybe a knock on effect from the change from defined benefit to defined contribution? If it was a defined benefit, then there was a goal. Now, it’s, well just make me as much as possible.

Well, there is a goal. There is a liability and there’s a real one, and I remember having a lengthy conversation, literally with the FSB, with their legal department, and saying, “You said, very explicitly in Reg 28 that the assets have to be appropriate to the liabilities. Now what are you defining as a liability?” We sat there for several hours, trying to define and make sure that we were on the same wavelength as the FSB, around what that liability was, and that liability is real. That liability is by necessity, the reality that that individual will no longer be earning an income when they retire, so you have to find a way to replace that income.

Now the problem is if you define the objective of investing as ‘just give me high growth’. What you ignore is the fact that to secure that income requires you have to be managing against interest rate volatility. Not against market volatility but against the volatility of the annuity cost, if you’re going to buy annuities or income in terms of the fact that – let’s say you earn off a living annuity – you have to have a drawdown, and you can’t just – remember we kept saying, “Hope is not a strategy.” You can’t just hope that my balls to the wall (sorry, if I can say that) strategy is going to not tank out on me, while I need that income. I can’t do that. Post retirement investing is a huge untapped area of the market that we’re not using that incredible tool of asset management, which could answer that problem, which could do that.

Isn’t it just part of the human condition? That we like to gamble as a species – we like to believe that we can get a higher return? I’ll take you back to the very first hedge fund. An ‘Absolute Return Fund’. That was launched here, in South Africa. It was Mercury Asset Capital. It had to be delisted. No one wanted to buy it anymore because one percent a month I think it was generating, at that time, was too low for the market conditions that there was.

Hedge funds are supposed to be hedge funds. They’re not supposed to be, you know, ‘let’s go to the carousel’ and I think…

But this was one of those and the market didn’t like it. That’s what I’m getting at.

Oh, okay but let me describe – let me go back to another thing, and that is we have a very limited memory about what’s important in investing, we think… If I asked any South African professional, “What’s the most important thing in investing?” They will tell you returns, and I will tell you that that only started to happen – that absolute, sort of riveted fixation on returns, in the 80’s, and it didn’t happen before then. The reason why we had that shift is because of a very important event that happened in the U.S., and that was the democratisation of the markets, so you had changes in the Mutual Fund Regulations, in the U.S. (Mutual Funds are Unit Trusts in the U.S.). That suddenly meant that the guy on the street, the lay investor, the one that didn’t have a financial advisor associated with them, could enter into the market. Could go in with the big boys and start to invest.

Now the minute that happens – now, let me give you an example. When I first started investing, okay, and this was at the end of the 70’s (I shouldn’t admit that but anyway) – at the end of the 70’s. If I went to a financial advisor, you wouldn’t have a financial advisor. You’d have your trust fund manager, okay. That’s how it worked, because only the wealthy could go into the markets. That trust fund advisor would sit down with you and say, “What do you need to live off of? Let’s build you a bond portfolio, so that the coupon payments will guarantee that we’ve covered your cost of living, so I start with your needs, your funding of your lifestyle, and then after we’ve done that exercise. If there’s money left over, then let’s make a decision. What do you want to do with that? Do you want to take a punt on your family company or do you want to have a diversified portfolio of shares or what do you want to do?”

But that is the way that investing was done for individuals. The minute it becomes democratised and you have any Joe on the street be able to enter the markets, without the advantage of an advisor. What metric was the industry going to use to tell you ‘use this fund versus that one’? So what came out was that there’s an easy one – returns. Whoever has the highest return obviously, is best, which is, as we learnt today, is complete nonsense because a good return has very little to do with skill. It has to do with how much risk you took or what segment of the market was running.

I guess if 100 people are taking a high risk, then some of them are going to get it right and they are the next stars, who then…

And then they follow the money and the money goes to that performance.

Why’s that? Why does the money follow performance because it is historic?

Because remember, you have no metric, other metric, to look at and this worked in favour of the marketing machines of asset management companies, so I actually was involved in Amer, in the very early days, which became the CFA Institute eventually, and there was a really interesting battle that was brewing at Amer. There was a group of academics who said, “We should never allow historic returns to be the marketing argument for buying a fund because it’s meaningless,” and it is meaningless. We know that and we said, “You know that it is statistically insignificant. We can’t show skill,” and guess what? It just got squashed eventually because the industry just got too big for it, so it’s a fascinating story.

Anne, what are you doing now? I see you billed as being with the Alexander Forbes Foundation.

No, I’m with the Research Institution.

Sorry, the Research Institute.

Yes and the Research Institute looks at – it’s the best job in the country, I swear, and we look at the entire industry. The financial services industry and we ask them really, tough questions. How ballsy is my CEO to do this, okay, to set up this little team, and he says, “Tell me, is it working? Is the guy at the end of the value chain, the member, the guy on the street, actually getting what he deserves or have we really created a monster here?”

Now we started-off, the publication we do every year is called Benefits Barometer and it’s a real, hard look at the industry and asked a questions, “Are we delivering the goods?” If we aren’t then where are we failing and what is failing?” So it looks at that puzzle that I was talking about at the conference, where I said, “You’ve got asset managers giving you ten percent real return for the last 15 years but you’ve got a member retirement fund, who’s on average, only earning 32 percent of their income to replace when they retire, so where is this chain broken?”

What you’ll discover is it’s not the asset manager that’s broken. That’s why we are so adamant about the role of trustees on the board because the trustees are the ones, that go to the employer and say, “What are you doing? You’re allowing anybody to put whatever contribution rate they want to, to the fund. You do realise what this will do to them further down the road. You do realise that if you allow pensionable pay to be 50 percent of their take home salary then the disability coverage that you’ve provided for them will only cover half of that take home salary.

But how did we get there? How did we get into this situation?

We got there because as the industries were professionalised, and became much more complex, we became incredibly fragmented. So you end up with an asset consultant, who doesn’t speak to the liability consultant. Who doesn’t speak to the EB consultant, who doesn’t speak to the – and then you’ve got PF’s Circular 130 behind it saying, “Oh, by the way, you ought to separate your – you ought to make sure that you’ve got lots of different consultants from lots of different areas, so they can act as checks and bouncers.

So you have to turn this evolution around.

You do, and then that’s pretty much – that’s what Benefits Barometer is trying to do. It’s trying to say, “How do we change those problems? How do we change those conversations, and how do we get everybody back at the table?” Because the employer walked away. The policy maker is trying like heck to make the thing work, but he’s been kind of, you know – he hit a wall with the Unions, and that leaves pretty much everything under control, of the financial services industry. The great travesty there is that the financial services industry don’t understand or appreciate the fact that when you have a developing economy, like South Africa, the social protections that are embedded in our constitutions. That says we have the right to, which are these protections, came only because our fiscus is so limited. The outsource to the private sector, that can’t be done. We can’t create a Social Security system here. We don’t have the assets, so we have outsourced our social protections for our people, and only our working population so far, to the private sector. But their trading is ‘wee – let’s just have some fun with this’. This is an extra source of revenue.

Anne Cabot-Alletzhauser has got the best job in the world, as she tells us, working for the Alexander Forbes Research Institute. This podcast was brought to you by Absa, a member of Barclays.