5/20/2017 Particlephysicistshunshyperactiveinvestments

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European Organization for Nuclear Research (CERN)

Particle physicist shuns hyperactive investments

Cern makes cutting-edge discoveries but its pension fund is surprisingly risk averse
FTfm

9 HOURS AGO by: Madison Marriage

Cern,theprestigiousnuclearresearchcentre,isbestknownforblastingatomsarounditsLargeHadronCollider,
a27kmtunnelthatformstheworldslargestmachine.
Theorganisation,foundedin1954andstraddlingtheborderbetweenSwitzerlandandFrance,declaresboldly
onitswebsite:Whatistheuniversemadeof?Howdiditstart?PhysicistsatCernareseekinganswers,using
someoftheworldsmostpowerfulparticleaccelerators.
Againstthisbackdropofcuttingedgescience,itseemscounterintuitivethatthewomanchargedwithensuring
acomfortableretirementforCernscommunityof3,600scientists,researchersandsupportstaffisextremely
riskaverse.

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5/20/2017 Particlephysicistshunshyperactiveinvestments

ElenaManolaBonthond,chiefinvestmentofficerofCerns
$4bnpensionscheme,says:Idontlikehyperactivityin
investmentmanagement,orrushingintomakingdecisions.
There is an atmosphere in the Thereisanatmosphereintheinvestmentworldthatyouhave
investment world that you have to toreact,react,react.Buthyperactivityisnottheidealwayto
react, react, react. But hyperactivity approachinvesting.
MsManolaBonthond,aparticlephysicistbytraining,
is not the ideal way to approach workedinCernsriskmanagementandIToperations,before
investing movingtothepensionfundtohelpimproveitsinvestment
frameworkin2011.Themotheroftwo,whosaysshehas
grownupatCern,waspromotedtochiefinvestmentofficer
in2015.
SpeakingtoFTfmfromherofficeinGeneva,sherulesoutseveraltopicsofdiscussion,includingherviewson
thehedgefundindustry,herschemesfundingratioanditsapproachtomonitoringcorporategovernance.
TheCernpensionschemehasinfactreduceditsexposuretohedgefundssignificantlyoverthepast18
months,from16percentofitsassetsundermanagementattheendof2014toaround10percenttoday,
accordingtoitslatestfinancialstatements.
Thetrendisnotunusual.Hedgefundshavecomeunderfiercescrutinyfromtheworldslargestinvestorsover
thepastdecadeduetoconcernsabouthighfeesforpedestrianperformance.Lastyearinvestorspulled$110bn
fromthehedgefundindustry,thehighestlevelofwithdrawalssincethefinancialcrisis.
MsManolaBonthondinitiallydeclinestocommentonwhyherschemeshedgefundallocationhasdeclined
sosignificantly,orwhetherthisrelatedtoconcernsaboutcost.Iprefernottomentionthereductionofhedge
fundsatall,shesays.
Aftersomeprobingviaemail,shelaterexplainsthechangewasduetothefundsdecisiontomoveawayfrom
socalledabsolutereturnstrategiesthatattempttogeneratepositivereturnsinanymarketenvironment,in
favourofinvestmentsthatprovidemorediversification.
Theschemeremainedinvestedinseveralhighprofilehedgefundcompaniesattheendof2015,including
BrevanHoward,TudorInvestments,BridgewaterandCitadel.
UnlikehercounterpartsatsomeofEuropesmostinfluentialpensionschemes,MsManolaBonthondisalso
reluctanttodiscusstheEuropeanCentralBanksrecordlowinterestratepolicy,whichcriticsblameforhurting
theinvestmentperformanceofretirementfundsacrossthecontinentoverthepastfiveyears.
AsamemberofCernIdontwanttosayanythingpolitical,shesays.Itisclearthatlowinterestratesposea
challengebothforpensionfundsandforassetmanagers.Butpolicymakers,Ibelieve,aremakingthebest
possibleeffortstokeepthesituationundercontrol.
Theschemesfundingratio,whichdemonstratestowhatextentitwillbeabletopaypensionstoworkersin
future,isanothersensitivesubject.Thelatestaccountsindicatethat,byinternationalaccountingstandards,its
ratioofassetstoliabilitiesisworryinglylow,atjust40percent.
Theaccounts,publishedlastMay,goontosaythatinternationalaccountingstandardsproduceavery
conservativefundingratiothatisinappropriateforassessingthehealthofthefund.AccordingtoCerns
alternativemethodologyforassessingthestrengthofthescheme,itsfundingratiois73percent.
MsManolaBonthond,whogrewupintheCroatiantownofDubrovnikbeforestudyingparticlephysicsat
Cerninhertwenties,shiesawayfromdiscussingthesefiguresaltogether.Iamnotwillingtocoverthefunding
themeasmyscopeofactivitiesisfocusedexclusivelyoninvestments,shesays.
The47yearold,whosePhDexaminedwhetherneutrinoparticlesproducedbyradioactivedecayhavemassor
not,ismorecomfortablediscussingthefadsshefearssomeinvestorshavebeendrawnintoinabidtoachieve
betterreturns.
AlthoughCernspensionschemeinvestsinsomeoftheincreasinglypopularilliquidassetclassessuchas
privateequityanddebt,shebelievesotherinvestorsarecrammingintotheseareas,irrespectiveoftherisks.
Thisisthebigtemptationofthecurrentlowgrowthandlowyieldenvironment,shesays.
Theassetclassesthatonereallyhastobeattentivetoarethosewhereyoudontseevolatility,andthenone
day[produce]asurprise.Thatmeansbeingextremelyselectivewhenchoosingilliquidalternatives.Thereare
veryfewshortcuts.

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5/20/2017 Particlephysicistshunshyperactiveinvestments

MsManolaBonthondisparticularlyconcernedabouttheriseofsmartbetastrategiesthataimtoprovide
marketbeatingreturnsatlowcostthroughindextrackingvehicles.Smartbetafundsdrewanet$24bnfrom
investorsinthefirstthreemonthsof2017,a2,000percentincreaseonthenetinflowsrecordedoverthesame
periodlastyear.
Moreandmoremoneyisflowingtothosestrategies.Whenyouseealotofmoneyflowingin,youcan[bet]
thatperformancewillnotbe[what]isadvertised,shesays.Smartbetaisverygoodonpaper,buttherecanbe
anumberofuntoldrisksthere.
TohelpCernspensionfundprepareforpainfulmarketsurprises,MsManolaBonthondhasincreasedthe
schemesuseofstresstests.Theseaimtomeasuretheimpactofunexpecteddevelopments,suchasastock
marketcrashorasharpriseininflation,onthefundslongtermperformance.Sherecognisesthelimitationsof
theresults,however.
Whetherthereality[ofamarketcorrection]willbesimilartoastresstestisdifficulttoanswer.Theresults
makeyouthink,shesays.Themacrooutlookisverydifficultbecausevaluationsareveryhigh,but,onthe
otherhand,growthmightpickuptoasustainablebase.Thesearethebigunknowns.
Thechallengeforustodayistoaccepttherealitythatweareinalowyieldenvironment,andrefrainfrom
takingriskswecannotmaster.Thepermanentlossofcapitalisthemostimportantriskforapensionfund.
Grapplingwiththerisksposedtothefundfromswingsincurrencymarkets,inflation,interestratesand
geopoliticsseemsaworldawayfromherbackgroundinparticlephysics,butMsManolaBonthondinsistsshe
doesnotmissherscientificcareer.
She,too,isseekinganswerstotheworldsmysteries,sheadds.[Mycurrentrole]isextremelyinteresting.
Whatisevenmoreinterestingisthatyouhaveawindowintotheworldyouareconnectedwiththeeconomic
realityoftheentireplanet.Thisisthemostfulfillingdimensionofthework.

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