Looking Back – Investment Strategies Learnt through History

April 22, 2010 - PRLog -- Interview with: Nigel Lewis, Managing Director, Strategic Research & Risk Management, Teacher Retirement System of Texas.




Predicting the future is impossible. But the past offers valuable lessons that can help avoid investment mistakes in the future, notes Nigel Lewis, Managing Director, Strategic Research and Risk Management, who oversees in excess of USD 40 billion at the Teacher Retirement System of Texas. A speaker at the marcus evans US Pensions Summit 2010, taking place in Florida, April 18-20, 2010, Lewis discusses history, taking advantage of market inefficiencies and the winning investment strategies at the Teacher Retirement System of Texas.

What are some of the challenges facing pension fund investment executives in the US, and what solutions would you recommend?

Nigel Lewis: Controlling risk and meeting return expectations are key concerns for pension fund executives. Given the poor performance of US equities over the past decade, many investors are asking what asset allocation can generate better returns – a larger allocation to real estate, high yield or emerging markets? But, it is important to realize that future performance is critically dependent on the prevailing economic environment. At Texas Teachers, potential economic environments are “baked” into our strategic asset allocation.

What are the winning investment strategies in your opinion?

Nigel Lewis: The key to successful investing is to act rationally or to try to act rationally when many are acting less rationally. Texas Teachers is large, liquid and has a very long term investment horizon. Given that markets are inefficient, therefore we can position our fund to take advantage of “market dislocations” wherever and whenever they take place. For example, in March 2008 we rolled out a dislocated credit strategy to take advantage of the dislocations in high yield, bank loans and so on. Credit is not in our benchmark, but we opportunistically took advantage of the market inefficiencies during the crisis.  

Another valuable lesson history has taught us, is that leverage matters. Leverage cannot make a bad investment good but it can make a good investment bad. Texas Teachers does not use leverage at the fund level. A robust strategic asset allocation which reflects the economic realities we experience is also necessary. We base our investments on three potential scenarios characterized by different levels of economic growth: reflation, deflation and global growth. About 60 per cent of our assets are allocated to a global growth scenario, and 20 per cent of our portfolio in each of the other two scenarios.

We test our policy allocation on a regular basis, using a number of qualitative and quantitative tools. We look at both shorter term measures such as volatility and value of risk and I have also developed some longer term risk metrics which have appeared in various investment journals. As we serve 1.3 million members, attaining and retaining the best investment professionals is also important for us as is the publication of leading edge research. A deep, deep intellectual capacity, understanding and contribution to knowledge about efficient asset allocation are critically important. Too few public pension plans possess this capability. At Texas Teachers, we are very fortunate. For example, in my group we have PhDs from Cambridge, Brown and Harvard. My own research on asset allocation and efficient risk taking has appeared in numerous investment journals. Texas Teachers is a thought leader on strategic asset allocation and risk management.

Which investments or asset classes would you recommend to investors?

Nigel Lewis: Making predictions about the future is difficult, but what we do know is that markets are generally valued on a long term basis. Most equity markets are not as attractive as they were a year ago; in fact it is unlikely that 2010 equity returns will match those of 2009.

Having deep and meaningful relationships with partner investment organizations is thus critical. At the end of every year, we survey our top hundred or so investment relationships, and ask them what they think will be the most and least attractive asset classes or investment ideas on a one and three year basis.

For 2010, the most attractive asset class according to the weight of our crowd was emerging markets followed by domestic US large cap and high yield bonds. On a one year basis the most attractive assets were US treasuries, real estate and cash, and on a three year basis the most attractive were emerging markets, real estate and distressed equities. Sovereign bonds, cash and gold were the least attractive overall. Surveying our partners gives us a good sense of what is attractive, unattractive and critically important.

What is your outlook on the future?

Nigel Lewis: Looking back on the past 10 or 20 years, the biggest change has been the increasing impact of developing countries on the global landscape. I believe we are going to see a continued reduction in home country bias. We will also begin to see greater focus on risk allocation rather than asset allocation. Investors are going to start measuring their risk exposures and find that most are coming from equities, and they will develop new and innovative ways to reduce that risk exposure. But most importantly, better approaches to strategic asset allocation, along the lines discussed in my recent journal papers, will begin to take hold.


Contact: Sarin Kouyoumdjian-Gurunlian, Press Manager, marcus evans, Summits Division

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About the US Pensions Summit 2010

This unique forum will take place at the Doral Golf Resort & Spa, Miami, Florida, April 18-20, 2010. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The summit includes presentations on investment management, projecting liabilities and delivering value to pension fund members.

For more information please send an email to info@marcusevanscy.com or visit the event website at http://www.uspensions-summit.com/NigelLewisInterview

Please note that the summit is a closed business event and the number of participants strictly limited.

About marcus evans Summits

marcus evans Summits are high level business forums for the world’s leading decision-makers to meet, learn and discuss strategies and solutions. Held at exclusive locations around the world, these events provide attendees with a unique opportunity to individually tailor their schedules of keynote presentations, think tanks, seminars and one-on-one business meetings. For more information, please visit http://www.marcusevans.com

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