A clearer understanding between pension schemes, their members and fund managers about the way markets operate is likely to support better outcomes for savers, according to delegates at a recent NEST and IMA event.
NEST and the IMA brought together assets owners, fund managers and investment service providers to debate the perceptions and misconceptions around investment beliefs and investment philosophies.
Supporting the discussion was indicative research provided by Dr Paul Cox that suggested while investment beliefs and investment philosophy are sometimes seen as interchangeable, they often fulfil different functions for different parties.
NEST Chief Investment Officer Mark Fawcett said:
‘Ensuring that trustees, asset owners and fund managers understand the differences between each other's priorities and terminology is likely to be helpful in improving alignments of interest for all. Setting out publicly how NEST believes investments and financial markets function enables existing and future members, employers, intermediaries and our commercial partners to have a clear understanding of how NEST invests its members' money and why. In addition it will lead to an increased likelihood of making good investment decisions and doing so on a consistent basis.
‘NEST's seven evidence-based investment beliefs are guiding principles for our investment decisions. In an automatic enrolment world, a greater emphasis on providing clarity around why an investment approach has been chosen is designed to increase trust and confidence in long term saving for all.'
IMA Chief Executive Richard Saunders said:
‘Auto-enrolment is bringing fundamental change to the relationship between individuals and those who manage their long-term savings. It implies major opportunities but also significant challenges for fund managers and others responsible for investment decision-making. Articulation of investment beliefs will have an increasingly important role to play, and the debate we have started here will help in that process.'
NEST's research, carried out by NEST's academic adviser Dr Paul Cox, looked at nine common expressions of investment beliefs and investment philosophy. Respondents included trustees of pension schemes, fund management providers and third party service providers, such as investment advisers.
The beliefs and philosophies considered within the research were:
what type of risk is believed to be rewarded
how financial markets are thought to operate
willingness to bear investment costs
appropriate level of governance
investment style
commercial value proposition
investment time horizon
origins of abnormal returns
benefits of diversification.
The findings suggest that beliefs are more closely associated with pension schemes and asset owners, whereas investment philosophies are more associated with the fund management industry. This seems to lead to components of beliefs or philosophies being prioritised differently depending on whether it is a client or a supplier of fund management.
For example, ‘investment style' was the fifth most important component within investment beliefs, but the most important component to an investment philosophy, while respondents felt that the benefits of diversification was the most important element of investment beliefs, but only the seventh most important element of investment philosophy.
Investment beliefs appear to emphasise an ideological and governance position, whereas an investment philosophy focuses on a commercial and implementable proposition.
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