Panel
Taking the Long View: The Dangers of Short-Termism
- The Japanese Government Pension Investment Fund (GPIF) aims for a 1.70% real return to sustain its defined benefit scheme for the next 10 decades, facing significant volatility from equity markets and a fixed income landscape where half the portfolio yields zero.
- CalSTRS projects a requirement for 35 to 50 additional professionals over the coming years to achieve a 10.5% private equity return assumption, warning that failure to acquire this talent will prevent meeting the target.
- The New York State Comptroller's office finds a 7% geometric return very difficult to achieve under current asset allocation due to economic growth, inflation, and interest rate dynamics, while the City of New York anticipates a 30 to 40-year horizon to smooth asset value variances and impact taxpayer contributions.
- Under new GASB rules 67 and 68, funding ratios are expected to become more volatile, creating short-term performance pressure that boards must resist to maintain long-term behavior.
- CalSTRS anticipates reporting both legacy and new quasi-market value figures, which may show a funded ratio drop from 99% to 70% between years due to methodology changes rather than investment performance.
- Hiro Mizuno expects that challenging quarterly reporting standards could reduce stakeholder popularity, as stakeholders might misinterpret advocacy for long-termism as an attempt to hide risky investments.
- CalSTRS activist managers maintain an average holding period of three to five years, while the passive portfolio holds assets for over 20 years, aiming to encourage CEOs to develop three-to-five-year business plans instead of 90-day plans.
- To address market inefficiencies, GPIF plans to issue strict proxy voting guidelines for U.S. companies and offer performance-based fees to non-Japanese fixed income managers to ensure better alignment of interests.
- GPIF indicates willingness to pay higher fees to passive managers who provide a credible strategy for aggressively engaging with the 2,000 listed companies in Japan.
- Scott Evans anticipates a potential shift to incentive fees with clawbacks on total partnerships, arguing the traditional 2-in-20 model is broken for large funds, and warns that failing to achieve transparent gain-sharing could lead to exiting private asset classes.
- CalSTRS estimates it can manage a $160 billion public index portfolio in New York City for less than two basis points, contrasting with the higher costs associated with active management.
- The panelists warn that unresolved compensation disconnects could lead to a loss of talent, resulting in a self-fulfilling prophecy where target rates of return cannot be met.
- A long-term expectation exists that the U.S. public pension structure, currently operating under a 1970s governmental business model, will eventually undergo structural change, though the specific catalyst remains uncertain.
- CalSTRS proposes that asset managers with legacy funds over 20 years should transition from receiving management fees to receiving only incentive fees for business operations.