Institutional Investment - December 11, 2006

EDHEC Institutional Days & ETF Summit 2006 a great success

The latest international conference organised by the EDHEC Risk and Asset Management Research Centre proved to be a great success, with 810 delegates attending the two-day EDHEC Institutional Days & ETF Summit 2006 at the CNIT in Paris on November 21st-22nd.

Participants were especially complimentary about the unique concept of an academic research centre providing an international conference for institutional investors and asset management professionals. Fons Lute, Chief Investment Officer of the Blue Sky Group in The Netherlands, who chaired the session on ETFs in the institutional asset management area said that,

"Chairing a panel session at the EDHEC Institutional Days conference was really an interesting experience to me. The quality of the research that was offered was high, industry panelists did a great job in reacting to the findings that were presented and the audience showed to be very involved. What more can one want as a chairman? EDHEC should be credited for delivering yet another remarkable event for institutional investors and asset management professionals!"

Among the applied research results presented at the conference were an exclusive EDHEC study on the limitations of broad equity indices with regard to their efficiency and purity; a pan-European survey on the role of ETFs in an institutional investor's asset allocation; and a major study on the impact of IFRS and Solvency II constraints on institutional asset management.

Assessing the Quality of Stock Market Indices: Requirements for Asset Allocation and Performance Measurement

The results of the study entitled "Assessing the Quality of Stock Market Indices: Requirements for Asset Allocation and Performance Measurement", clearly show that most market indices used as a reference by investors are neither efficient nor stable in terms of style and sector exposure. This inefficiency and instability is a source of underperformance and poor risk management and results in a failure by investors to optimise the risk-return trade-off of their portfolios. EDHEC offer solutions to these difficulties and recommend, in particular, that investors favour the construction of benchmarks based on geographic zones using combinations of style or sector indices and that they use a ‘completeness core portfolio’ approach in order to ensure that their asset allocation is more stable.

The EDHEC European ETF Survey 2006

In the EDHEC European ETF Survey 2006, the EDHEC Risk and Asset Management Research Centre has carried out an in-depth study on the use of ETFs (Exchange-Traded Funds) by European investors. The results of the survey show that following rapid growth, ETFs are being widely used by European institutional investors, private bankers and asset managers. The increasing popularity of ETFs is reflected in the responses of survey participants. More than half of the respondents are current or planned users of ETFs in equity investments (61%), and this is the case for more than a quarter of respondents (26%) for bond investments.

Concerning the main future areas of development for ETFs, a clear majority of survey respondents quotes emerging markets (49%), commodities (36%), and, more broadly, alternative asset classes (41%). However, currently, only a small percentage of respondents are using such funds. When comparing ETFs to alternative methods of indexed investing, European investment management professionals quite clearly favour ETFs over instruments such as futures, traditional index funds and total return swaps. Consequently, 55% of respondents think that the use of ETFs will increase in the near future, while only 34% have the same opinion about futures, and other instruments achieve even lower scores.

The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies

Jointly produced by the EDHEC Risk and Asset Management Research Centre and the EDHEC Financial Analysis and Accounting Research Centre, "The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies" reveals the contradictions inherent in the current Solvency II and IFRS provisions for insurance companies. The report shows notably that the numerous provisions proposed by the IFRS are at odds with the good risk management practices put forward by Solvency II.

While IFRS and Solvency II should lead to a genuine evolution in the management of insurance companies, by empowering them with respect to their risks (identification, measurement and management), one is forced to observe today that the standards implemented often oppose their initial objectives: the adoption of modern asset management and ALM techniques with a view to reducing the exposure to risks is considerably penalised by the IFRS treatment by leading to additional purely accounting volatility, without any connection to the economic reality. For most of their activities, insurance companies have long-term or even very long-term liabilities that in turn justify long-term allocation. Measuring their solvency on the basis of short-term values is not only incompatible with the need for investment in assets that, while risky, yield very positive average long-term returns, but also means that any genuine asset-liability management is an illusion, even though the regulators actually hope to promote ALM.

EDHEC believes that the only basis for analysts and regulatory authorities to assess the financial soundness and durability of an insurance company should be an analysis of the consistency between the liability risks and asset risks and an evaluation of the consistency and robustness of the asset-liability management models used. Finally, EDHEC feels that the particular nature of long-term investors’ liabilities, be they insurance companies or pension funds, is such that both regulators and financial analysts need to attach greater importance to the ongoing concern principle (which is an accounting principle), rather than suppose that the notion of fair value will transcend the whole of the accounting doctrine.

The executive summaries to all three of these reports can be found below.

To access the plenary session presentations and full conference details, please refer to the EDHEC Institutional Days & ETF summit web page.

EDHEC Asset Management Days 2007, Geneva, March 12-13

The EDHEC Risk and Asset Management Research Centre is staging the second edition of the EDHEC Asset Management Days in Geneva in March 2007. This event will be a new opportunity for academics and practitioners to meet and to discuss the most recent research achievements of the EDHEC Risk and Asset Management team.

The inaugural EDHEC Asset Management Days took place in Geneva on 21st and 22nd April 2005 and gave around 600 industry practitioners, including institutional investors, private bankers and institutional money managers, the opportunity to meet and debate with EDHEC’s research team.

EDHEC Asset Management Days 2007 will explore how to use the most recent research advances and the latest industry innovations as new sources of value in investment management. The themes covered by EDHEC's research specialists and distinguished figures from the institutional investor and asset management worlds will include:

  • Advances in Wealth Management
    • The Core-Satellite Approach to Wealth Management
    • Asset Liability Management in Private Banking

  • New Paradigms in Asset Management
    • Liability Driven Investing Solutions in ALM
    • Optimal Equity Indices and Asset Management
    • MiFID and the Challenges of Best Execution
    • ETFs in Core-Satellite Investing
    • Dynamic Core-Satellite Management

  • Alternative Investments and Absolute Return Strategies
    • New Absolute Return Strategies
    • Novel Design Techniques for Absolute Return Funds
    • Innovations in Real Estate Investment and Risk Management
    • Emerging Alternatives to Hedge Funds

For more details or to register for this conference, please contact: Mélanie Ruiz – Tel.: +33 (0)4 93 18 78 19 – E-mail: eamd2007@edhec-risk.com, or refer to the EDHEC Asset Management Days 2007 web page.

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