Niagara Institutional Dialogue 2013
As the Economist recently noted, bank assets have now surpassed 200% of GDP in many countries, growing much faster than GDP since 1970. Various studies have suggested that growth in the banking sector both results from, and contributes to, rising global trade and enhanced GDP growth. Thus, to many, banks are the heroes of globalization.
But as the recent financial crisis suggested, the hegemony of the global banking system comes with costs. Multinational banks became too big for their host nations to support them in times of trouble, overly simplistic compensation systems led to excessive risk taking, and financial regulation failed to keep up with financial innovation. So, to others, banks are the highwaymen of global capitalism.
It was against this backdrop that the Niagara Institutional Dialogue gathered for its fourth Annual Meeting in Niagara-on-the-Lake, Ontario June10-12, 2013. Themes for this year’s meeting included: monetary policy around the globe, the health of the banking system, political and geopolitical challenges, investment strategies and fiduciary management. The 2013 “NID Honouree” was The Right Honourable Paul Martin, who also attended much of this year’s proceedings.
As always, the objective of the symposium was to examine the “context” of institutional investing rather than the specific “content” of institutional portfolios.
Dr. William White, Chairman of the OECD’s Economic Development Review Committee, and former Deputy Governor of the Bank of Canada, opened the dialogue with a discussion of the possible unintended consequences of an ultra-easy monetary policy. White argued that while excessive private leverage led to the crisis, the solution must involve more public leverage. As he put it in Niagara-on-the-Lake, “The solution must be both Austrian and Keynesian.” White also acknowledged that significant risks remain and that policy makers must continue to be vigilant.
Author and columnist Richard Duncan also highlighted the supremacy of the banking sector over governments and central banks. According to Duncan, capitalism (where central banks control the money supply) has given way to “creditism” (where banks control the money supply through credit creation). Duncan told the gathering that he worries “…the Austrians were right, but that they didn’t live in a world of fiat money as we do today.” He concluded that if developed countries can create a trillion dollars of credit to rescue the financial system, they should be able to take advantage of this window of opportunity to invest newly-created credit to transform their economies in productive and long lasting ways.
Don Drummond, former Chief Economist at TD Bank Financial Group and former Associate Deputy Minister of Finance of Canada noted that Canadians were not adequately prepared for retirement and that the nation’s retirement programmes needed to be re-examined. Despite a common belief that the success of Canadian banks over the past 5 years was a result of conservative financial regulation, no banks ever came close its maximum permitted levels of leverage. In other words, banks made adequate profits in Canada without the need for aggressive leverage according to Drummond.
Nicholas Le Pan, Superintendent of Financial Institutions for Canada (2001-2006) gave regulators a “C-“ for their performance since the onset of the financial crisis – arguing that most regulators remain under-resourced and lack staff with adequate banking sector expertise. In contrast, he assigned the banks a collective “B+” for their efforts to clean up their balance sheets and reduce risk.While the challenges faced by financial regulators are now widely understood, the motivations and behaviours of banking executives remain hotly debated. Are they really the “banksters” that critics contend? Or is there “method in the madness”? Noted Sanford Bernstein analyst Brad Hintz provided participants with a comprehensive overview of the economics facing bank executives. Hintz argues that margin pressures – particularly those in fixed income markets – are a top concern for bank management teams and have driven their recent management decision making.
Political / Geopolitical Environment
Both monetary policy and the banking system operate in the context of political and geopolitical framework. In accepting the 2013 “NID Honour”, The Right Honourable Paul Martin discussed a wide range of global and domestic financial issues from the G20 to the Financial Stability Board to the possible role of Canadian pensions in aboriginal economic development. As Finance Minister, Martin was instrumental in creating the Canada Pension Plan Investment Board (CPPIB) and establishing it as an independent entity free of federal or provincial political interference. Today, this unique governance model and its resulting investment approach have attracted the interest of large public sector funds around the world.
Queen’s University’s Bryne Purchase highlighted the hurdles created by our current political structures and public sector governance processes. Using global climate change as an illustrative case study, he showed that modern political concepts such as “branding” can pervert rational policy making. According to Purchase, current political systems and structures actually contribute to economic calamities and therefore need to be dramatically re-engineered.Jami Miscik, a member of President Obama’s Intelligence Advisory Board and President of consultancy Kissinger Associates examined the future of several global hot spots including the South China Sea, Syria and other Middle Eastern flash points. In a wide-ranging discussion that ensued, participants also pressed Miscik on her views of the Eurozone, Canada/US relations, and the impact of the US shale oil revolution on US/Middle East relations.
Several leading asset managers and supporters of the Niagara Institutional Dialogue then explored the implications of these exogenous developments on the asset allocation decisions faced by Canadian institutional investors. In keeping with NID convention, none of the managers were permitted to discuss their firm’s own products. Instead, they were tasked with educating participants on the evolving risk/reward dynamics of each asset class.
Willaim De Vijlder, CIO of “Strategy & Partners” at BNP Paribas began this dialogue by introducing a new framework to assess risk in what he termed an “unanchored” investment world. In De Vijlder’s opinion, new central bank strategies can be judged not only based on their policy implications, but also based on how effectively they are communicated to the market and how the transition is managed. The current transition to a new central bank regime left De Vijlder with, in his words, “a peaceful uneasy feeling.”
Several senior portfolio managers followed this with an analysis of individual asset classes. During a mock pension committee presentation, Chris Blanchard of Presima reported that REITs now provide enhanced liquidity and contain high quality real estate investments at a relatively low cost.
Dan Marchand of Nuveen Investments provided an overview of global listed infrastructure as an asset class and reported that the best global infrastructure investment opportunities are now often held by listed companies and not through direct investments by large pension funds.
Siddharth Dahiya of Aberdeen Asset Management and Samy Muaddi of T. Rowe Price both provided an excellent overview of emerging market corporate debt. Although emerging markets are generally thought to be risky, Dahiya and Muaddi informed participants that emerging market default rates were similar to those of the same rating in the developed world. In addition, they said, emerging market corporate debt is often rated higher than emerging market sovereign debt.
Alfred Lee of BMO provided evidence from ETF fund flow data of a “great rotation” from fixed income to equities. However, Lee pointed out that while equity ETF flows were very high, fixed income flows were still increasing modestly. Lee also discussed the underlying mechanics of the ETF creation and redemption process by market makers in detail.
Finally, Philippe Lespinard of Schroder Investment Management explored the medium term future of fixed income markets by comparing and contrasting two policy models facing central bankers.
In keeping with the interests of its core constituency of institutional investors, the heart of this year’s curriculum focused on the demands facing institutional fiduciaries. Malcolm Hamilton, former Partner with Mercer and 2012 NID Honouree, provided participants with a cogent and honest assessment of the Canadian retirement landscape. In a session dubbed “Malcolm Unplugged” Hamilton argued that the age of retirement should not be increased without significant further analysis and that, contrary to naysayers, the median Canadian family is indeed prepared to cover living expenses in retirement.
Risk management continued to be a concern to participants at this year’s gathering. As a result, Daniel Wywoda, Head of Global Product Management at BNY Mellon Asset Servicing, was invited to review recent developments in holistic risk management strategies for pensions and foundations.
And as always, the annual “great debate” provided some of the lighter moments of the meeting. This year, participants were challenged to reassess traditional “60/40” asset allocation. Jim Keohane, President & CEO of the Hospitals of Ontario Pension Plan (HOOPP), debated Malcolm Hamilton in a parliamentary-style dual moderated by “Speaker of the House” Hugh Innes of the Rekai Charitable Foundation (an NID Advisory Committee Member).
By mandate, the Niagara Institutional Dialogue does not aim to generate a consensus or agreement among members – only to facilitate a dialogue on the common issues facing Canadian institutional investors.
Nonetheless, several broad themes seemed to arise from this year’s proceedings. Chief among them were a set of paradoxes and balancing acts.
William White argued that a Keynesian solution was needed for a somewhat “Austrian” reality; Richard Duncan juxtaposed capitalism and “creditism”; Nicolas Le Pan’s sympathy for regulators was mirrored by Brand Hintz’s acknowledgement of the pressures on bank executives; Don Drummond implored us to find new economic theories to replace failing ones; Hamilton and Koehane illustrated that we are far from agreeing on a new asset allocation framework to match new economic realities; Philippe Lespinard said central banks have two possible and distinct courses of action; and Bryne Purchase described policy making in terms of the ubiquitous balance between individual liberties and social stability
This year’s dialogue suggests that institutional investing remains highly contingent on global and domestic policy making and economic performance. While “connecting the dots” to drive specific and immediate institutional investment decisions may be difficult, we hope the discussions that took place at the fourth Annual Meeting of the Niagara Institutional Dialogue contribute to your contextual framework for decision making throughout the year ahead.