David Bell, executive director of the Conexus Institute, reflects on the key themes of the Fiduciary Investors Symposium held at the University of Toronto last month including AI and its applications, the importance of governance for a strong pension model and common challenges faced by asset owners.
AI – fascinating developments, important core messages
The AI vertical stream (overviewing the technology, the investment opportunities, and the use opportunities for pension funds) was a feature of the symposium program.
Professor Ajay Agrawal’s keynote was my symposium highlight. By sharing his extensive AI domain knowledge through the filter of economic discipline, some important messages emerged:
- AI is all about prediction. Not all predictions made by AI will have equivalent levels of fidelity, something we need to be cognisant of. For instance, I am grounded by the difficulties of forecasting markets with any accuracy, so would be hesitant to rely strongly on AI. A nuanced trade-off between model insights and model transparency emerged through case studies. This needs to be balanced along with associated governance challenges.
- Focus on business outputs not inputs. Clarity on what you are trying to achieve with AI (business outputs) is a first step which will determine what AI inputs are required.
- Be aware of both point solutions and system solutions. Point solutions are those which affect part of a process, delivering productivity benefits. Here an investment application could be use of AI to review the data room associated with a private deal. System solutions are wholistic re-imaginings of how an output can be delivered, with transformational benefits. It is difficult to envisage system solution opportunities amongst asset owners due to…
- Friction of AI adoption will be greatest in regulated industry sectors. Regulated sectors will likely experience the greatest scrutiny around their use of AI. Pension funds and other asset owners generally fit in this category.
- The opportunity for clear market leadership (via the user feedback loop) explains the strong (and investment) focus by companies on AI. This presents an interesting investment dynamic for asset owners: a likely substantial dispersion between winners and losers, warranting consideration of a thematic opportunity but also an important implementation consideration (active vs passive).
Sustainability – Canada’s mature, balanced approach
As an Australian it was impressive to observe the degree to which climate and sustainability activities have been integrated into the investment processes of Canadian pension plans. Resolved, integrated objectives, mature positions on competing issues, acknowledgement of the broad trends in areas such as energy transition (along with associated risks), the setting of research-backed targets, and high-quality reporting were all strong features of Canadian funds.
In public markets there is a general acknowledgement of funds’ roles as universal owners, and the associated opportunities for active ownership and collaboration amongst with other asset owners. The opportunity for direct impact via private markets appears greater, due to an arguably longer-term focus (avoiding the short-term performance scrutiny experienced by public companies), and potential to have board representation.
The challenge remains that not every domestic investment will be financially appropriate. However, having integrated financial investment frameworks allows funds to make informed decisions, and positions them to explain clearly to governments the gap in the risk/return threshold. The opportunities appear strong for quality investors to work cooperatively with governments on impactful investment opportunities.
Addressing the capital requirements to finance the energy transition of developing economies appears less resolved and more difficult, yet many of the externalities will be borne by all.
Common challenges faced by asset owners
It was a privilege to study the ‘Canadian model’, from its origins (shared by Keith Ambachtsheer, Claude Lamoureux, Mark Wiseman and John Graham), and its foundations (independent governance, professional in-house investment management, scale, and extensive geographic and asset-class diversification).
However, the challenges faced by Canada’s system are broadly universal in nature. Two of these challenges relate to AI and sustainability, which have already been addressed. Other challenges of note:
- There are strong frictions to being a long-term investor. A non-exhaustive list includes weaknesses in governance models, performance reporting approaches, incentive structures, regulatory frameworks (for instance Canadian pension plans need to re-value every three years), and the role of media.
- Managing complexity and maintaining a degree of nimbleness. While Canadian pension plans tend to be at the complex end of the operating spectrum of asset owners (due to greater use of derivatives and leverage), the general trend of increasing scale and breadth of investment activity creates complexity which can be difficult to manage effectively (the example of risk systems was highlighted). An outcome can be a loss of portfolio nimbleness and associated opportunity cost. Exploring the benefits of simplification is an area likely to receive greater attention.
- Creating portfolio resilience was a focus, where I identified three levers for successful implementation: (1) TPA (total portfolio approach), an approach commonly adopted by asset owners operating in less benchmarked settings, (2) emphasising risk management which creates accounts for different regimes and, and (3) a cultural and governance-level preparedness to realise lower returns in the core (most expected) scenario as a trade-off for greater expected performance in other scenarios. Given the framework and risk tools already exist I consider (3) to be the threshold issue.
- Managing cultural challenges as asset owners evolve. Challenge could come from areas such as changes in scale, operations, investment opportunities, technology, and objectives. A common cultural challenge cited was private market teams being directed to slow down on new transactions. The importance of incentive structures aligning with culture was highlighted.
As always, the challenges are sizable, but I always take the view that challenge equals opportunity. Through that lens the opportunity for asset owners to improve outcomes, in multiple dimensions, is substantial.
