Ben Inker of GMO (at right in photo) and Cliff Asness of AQR discussed how to create a portfolio—given a “clean sheet of paper”—to produce a 5% real return in the current environment. Inker’s advice: do not focus on earning that right now because it would create too much risk. One approach, he said, is that investors should ensure the portfolio had plenty of “dry powder” to take advantage of future opportunities, while squeezing out returns where possible without taking undue risk.
Asness echoed Inker, saying that a viable option is to do nothing now, with a portfolio expected to return 2% to 2.5%, while examining new opportunities. His favorite strategy is to look at factor approaches, such as smart beta, some of which are cheaper than historical norms and many of which look better compared to equities and their historical norms. He also said prudent assumption of some risk can boost returns, including taking more of some kinds of risk and less of other types. (For additional reference, here is a paper from Callan on how the risks needed to produce returns have increased over time.)
In his talk, Dr. Larry Summers, an economics professor at and former president of Harvard University, also addressed the issue of returns, one of the overriding challenges facing institutional investors. He said they need to lower their expectations—the assumption of a 7.5% nominal return over the next decade is “delusional”—because the current high prices of assets stems from expectations of lower returns, which has essentially pulled returns forward from the future.
Shlomo Benartzi, a professor at UCLA’s Anderson School of Management, told attendees they must think of themselves as “digital fiduciaries.” They not only need to design plans to serve participants better, but they also should focus on the digital tools used to access the plans. In addition, they need to improve the ways in which plan sponsors interact with participants in order to encourage more use of plans in the first place and more savings once people are in the plans.
Although particularly relevant to defined contribution (DC) plans, he said his advice was also aimed at defined benefit (DB) plans as well as endowments, foundations, and other institutional pools of money. DB plans, for instance, face challenges balancing assets and liabilities, made more complex by lump sum distributions. As technology makes taking those distributions easier, he argued, sponsors need to consider ways in which to make sure participants are choosing that option after a period of reflection, not by touching a button on a mobile device at the mall to make a big purchase.
He also argued that better use of digital tools will benefit managers, who will see assets increase as participants save more, and participants, who will see fees fall and will be better placed for retirement with higher savings.
Shlomo Benartzi, professor, UCLA’s Anderson School of Management: “Institutional investors should think of themselves as ‘digital fiduciaries.’”
