สรุปสาระจาก International Conference On “Pensions & Investments: Lessons Learnt and Challenges Ahead”
สรุปสาระจาก International Conference
On “Pensions & Investments: Lessons Learnt and Challenges Ahead”
25/05/60 2
ชื่องาน : Pension & Investment: Lesson Learnt and Challenges Ahead วัน/เวลา : 27 มีนาคม 2560 (จันทร์) สถานที ่: รร ดุสิตธานี (09:30-16:30) ผู้เข้าร่วมงาน : 1. สมาชิก กบข 2. หน่วยงานภาครัฐที่เป็นผู้เกี่ยวข้องเชิงนโยบายกับ กบข. 3. สื่อมวลชน 4. พันธมิตรธุรกิจ 5. คณะกรรมการและผู้บริหาร กบข. เนื้อหาที่เกี่ยวข้อง : Pension:
• หลักคิดและหลักการบริหารจัดการกองทุนบ านาญจากภูมิภาคส าคัญทั่วโลก • บทเรียนที่ผ่านมา การเปลี่ยนแปลงส าคัญ ของกองทุนบ านาญต่างๆ • สิ่งท้าทายส าหรับกองทุนบ านาญในอนาคต Investment • บทเรียนตลอดระยะเวลา 20 ปี ของการบริหารสินทรัพย์เพื่อการลงทุนส าคัญ เหตุการณ์ที่ส่งผล
กระทบต่อการเรียนรู้สิ่งใหม่ในการจัดการลงทุน • สิ่งท้าทายส าหรับการลงทุนในอนาคตข้างหน้า
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Overview of Public Pension
Systems in Emerging Asia
and Thailand
• Dr. Donghyun Park
• Principal Economist, Asian Development Bank
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• Old-age income support will be one of developing Asia’s biggest social and economic challenges in the 21st century.
• Social changes have weakened family-based old-age support mechanisms.
• Formal pension systems will have to play a bigger role.
• In contrast to OECD countries, Asia does not yet have mature, well-functioning pension systems.
• Many Asians are at risk of old-age poverty.
• Population ageing is an Asia-wide phenomenon
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Table 1. Pension Age and Basic Structure of Pension Systems, 2012
Note: Refers to public pension schemes, except for Australia which is a private pension plan. *Enclosed in parenthesis is the pension age for women. **In June 2015, a defined benefit scheme was introduced in Indonesia, with retirement age at 56 gradually increasing to 57 in 2019, and by an additional year every 3 years until NRA is 65. Source: OECD (2013); ADB (2011).
Diversity of key pension parameters
Economy Pension Age
(Years)*
Difference between Life
Expectancy and Pension
Age (Years)
Pension Scheme Income support for
elderly poor
Male Female
Developing Asia
China, People's Rep. of 60 (55) 14 17
Defined Benefit, Defined
Contribution (funded or
notional)
Yes
Indonesia 55 12 16 Defined Contribution** Yes
Korea, Rep. of 65 13 20 Defined Benefit Yes
Malaysia 55 17 22 Defined Contribution Yes
Philippines 65 5 9 Defined Benefit Yes
Singapore 65 15 19 Defined Contribution Yes
Thailand 55 16 23 Defined Benefit Yes
Viet Nam 60 (55) 11 20 Defined Benefit Yes
Advanced Economies
Australia 67 13 17 Defined Contribution
Japan 65 15 21 Defined Benefit
United States 67 9 14 Defined Benefit
Diagnosis of Asian Pension systems
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• The biggest challenge for Asian pension systems is limited
coverage.
• The share of the labor force which is covered by pension systems
ranges from 11% to 84%.
• The coverage rate for working-age population ranges from 8% to
64%.
• In advanced economies, pension systems typically cover around
90% of the labor force and between 60% and 75% of the working-
age population.
• Even in high-income Asian countries such as Korea, coverage falls
well short of developed-country levels.
Limited coverage as a challenge
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Figure 2. Share of Labor Force and
Share of Population Aged 15-64 Covered by Pension Systems
Note: Years are between 2009 and 2012 for developing Asian economies and 2005-2009 for advanced economies. Source: OECD (2013).
0 20 40 60 80
SingaporeKorea, Rep. of
MalaysiaChina, People's Rep. of
ThailandPhilippines
Viet NamIndonesia
JapanUnited States
Australia
%
Share of Population aged 15-65
0 20 40 60 80 100
SingaporeKorea, Rep. of
MalaysiaChina, People's Rep. of
PhilippinesThailand
Viet NamIndonesia
JapanUnited States
Australia
%
Share of Labor Force
Adequacy of Retirement income as another challenge
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0 20 40 60 80
Indonesia
Malaysia
Philippines
Singapore
Korea, Rep. of
Thailand
Viet Nam
China, People's Rep. of
%
Men
Women
Figure 3
Replacement Rate—Ratio of Retirement Income to Pre-Retirement
Income, 2012
Adequacy of Retirement income as another challenge
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0 20 40 60 80
Indonesia
Malaysia
Philippines
Singapore
Korea, Rep. of
Thailand
Viet Nam
China, People's Rep. of
%
Men
Women
Figure 3
Replacement Rate—Ratio of Retirement Income to Pre-Retirement
Income, 2012
Pension Reform: Asia wide
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1. National Blueprint
2. National consensus on old-age income support
3. Set up an independent National Social Security
Council (NSSC)
4. Improve transparency, accountability and
professionalism
5. Promote equity and sustainability
6. Achieve adequate retirement income
7. Mitigate old-age poverty
8. Improving returns on pension assets
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The NEW Landscape of
Retirement Provision in the
OECD and Latin America
• Dr. Pablo Antolin
• Head Private Pensions Unit
• Deputy Head OECD Financial Affairs Division
Main objectives of pension systems
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1. Reduce or eliminate poverty at old age
2. Make sure people save during their
working life to finance their retirement:
saving for retirement – consumption
smoothing
Two natures of pension systems
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1. Defined benefits plans:
• pension benefits are pre-defined (e.g.
public pensions, funded DB pension
plans)
2. Defined contribution plans:
• pensions benefits depend on the amount
of assets accumulated at retirement
Replacement rate in public pension
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41.6
0
10
20
30
40
50
60
70
80M
exico
Icela
nd
Israe
l
Esto
nia
Switz
erla
nd
Denm
ark
Irela
nd USA
Kore
a
Belg
ium
Germ
any
Cana
da
Norw
ay
Portu
gal
Luxe
mb.
Turk
ey
Hung
ary
Aust
ria
15
Changing Pension Landscape
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• Pensions landscape is changing in the face of challenges
– ageing populations,
– the fallout from the financial and economic crisis,
– the current environment of low economic growth and low returns.
• Increased role of pension arrangements in which asset
back pension benefits (funded pensions)
• There were 13 OECD countries assets than 50% of GDP
in 2015, up from 10 in the early 2000s.
• The number of OECD countries where assets in funded
private pension arrangements represent more than 100%
of GDP increased from 4 to 7 countries.
OECD main policy messages
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• Financial economics: do not put all your eggs in the same
basket
Diversify the sources to finance
retirement
• It is necessary to have public pensions as well as private
pensions, PAYG and funded pensions
Funded private pensions are
complementary to public pensions and
not a substitute.
Risks
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• Planning for retirement requires to make assumptions regarding several parameters going forward.
• Parameters such as: GDP growth, productivity, employment/ unemployment, wage growth, inflation, returns, interest rates (discount rates), and life expectancy.
• Future is uncertain, assumptions rarely materialize as expected: risks – Labour market risks: spells unemployment, career real wage paths
– Macroeconomic risks: inflation, growth, productivity
– Financial risks: returns,
– Demographic risks: longevity risk
– Pension management risks: costs, asset and risk management
– Social risks: disability and family members survivors
– Political risks: pension policy changes
• All these risks will affect the adequacy, coverage and the sustainability of pension policies.
Risks and pension arrangements: who bears the risks
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Non
contributory
Contributory
PAYG
Contributory
Funded DB
Contributory
Funded DC
Demographics (LR) PA PA PA Ind
Macro risks (growth,
productivity, inflation) PA Ind., Ind., PA Ind., Ind., PA Ind., (depends)
Labour mkt risks (wages,
unemployment) PA Ind., PA Ind. Ind.
Financial risks (interest
rates, returns) n.a. n.a PA Ind.
Pension management
(e.g. costs, risk mgt) PA PA PA Ind.
Social risk (disability,
survivors) PA Ind. Ind. Ind. (?)
Policy risk Ind. Ind. Ind. Ind.
Best practices?
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There is not best pension system. It depends on different criteria and the weight the society gives to each of them and their trade0ffs
1. Level of retirement income (replacement rates)
2. Coverage rates (mandatory vs voluntary, soft compulsion)
3. Fiscal and/or financial sustainability
4. Level of contributions
5. Individuals bearing risks
Public systems provide high coverage, high replacement rates and individuals do not have to bear risks, but they are expensive and their fiscal sustainability is in question.
OECD: combination public and private, complementing each other. Public sector safety net paid out from general budget
Conclusions
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Main objectives of pension systems: poverty alleviation and saving
for retirement (consumption smoothing).
All countries have a combination of different pension arrangements,
what varies is the weight.
Saving for retirement involves risks
Diversify sources to finance retirement: combine private and public
pensions
Private provision is complementary to public provision
Their complementarity is defined by how the objectives of pensions
are met and how the risks of saving for retirement are shared.
Shift from DB to DC
Advantages and disadvantages of DB and DC arrangements
Mandatory individual accounts: Latin America
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Pension Investment
- Challenges for Japanese
Pension Funds -
Mr. Yohtaro Takahara
Japan Investment Trusts Association
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Thai Government Pension
Fund (GPF):
Lessons Learned and Going
Forward
นาย ยิ่งยง นิลเสนา รองเลขาธิการกลุม่งานบริหารเงินกองทนุ
กองทนุบ าเหน็จบ านาญข้าราชการ (กบข)
31
GPF Overview
1997 Established
1 million Members
Defined Contribution Pension scheme
$ 22 billion Assets as of Feb 2017
6.6% Return per annum for 20 years
As of Feb 2017
Teachers 33%
Police 14%
Military 16%
Civil Servants 33%
Others 4%
GPF Members
32
GPF in Thai Pension System
In Labor Market
Pillar II Saving & Growth of
Pension Capital
Pillar I Social Safety Net
Pillar III Additional saving & capital development
Provident Fund $ 6 billion
Senior Citizen Allowance
Government Officers
Private Employees
Self Employed & Outside Labor Market
Social security Fund National Savings Fund
Social security Fund $ 45 billion
Pay-As-You-Go Pension Plan
Member Fund, $10.3 billion Reserved Fund, $11.4 billion
Retirement Mutual Fund($ 28 billion), Life Insurance
33
GPF Development
But adapt strategy to economic cycle and market environment
Long-term Focus
Diversify globally Diversify into alternative assets
Diversification
Good fundamental investments High Quality
Assets
$ 2 bn (1997)
$ 6.1 bn (2003)
$ 8.8 bn (2008)
$ 13.0 bn (2016)
34
Diversify to seek good return within acceptable risk level
GPF Exposure to Private Market Exposure to Global Investment
Others
Equities
GPF Development
Comparison with Leading Asia Pacific Pensions
Size Ranking
Names
Size ($ bn)
Avg. Return 2002-2015
Standard Deviation
Investment Allocation % Risky Asset
% Foreign Asset
% Private Market
1 GPIF
(Japan) 1,162.3 3.95% 7.63% 46% 36% -
3 NPS
(South Korea) 415.0 5.96% 2.84% 42% 24% 10%
13 EPF
(Malaysia) 180.9 5.68% 0.92% 36% 23% 3%
34 MPF (HK)
76.7 4.43% 14.02% 68% 38% -
191 GPF
(Thailand) 20.7 5.61% 4.28% 35% 25% 11%
Remark: Annual Reports and Willis Towers Watson September 2016
35
GPF experienced 5% negative return in 2008 This led to dis-satisfaction and option for some founding members to reverse to PAYG
defined benefit scheme 36
Comparison of cumulative returns of leading pensions in Asia Pacific
Global Financial
Crisis
Return Comparison
37
1 year perspective
Misperception of Risk
Long-term perspective
38
GPF members’ characteristics
GPF members survey
Preference on Investment Plans
Attitudes Towards Risk
Members with some investment experiences (39% of total members surveyed)
Can accept some volatility to earn 2-3% higher return 37.4%
Can withstand less than 1% return but cannot accept any loss 29.4%
Need higher return and can take some loss 23.7%
Can accept losses in some years to earn 4-6% higher return 9.4%
No loss in any year 52.0% Like to choose but have no time 20.6% Prefer default plan 17.4% Want to choose my own plan 10.0%
1-5% Loss 82%
6-10% 13%
11-15% 4%
>15% 1%
Maximum Tolerance for Annual Loss
39
Government Officers after Retirement
Government officers receive approximately 1 million baht from investment by GPF when retire
They also receive monthly salary after retirement (defined benefit portion - 70% of average last 5 yr. salary), funded by annual government budget
Proportion of Amount Received at Retirement
Remark: 1) The Retirement age at 60, assuming rate of interest of 3%, final salary of 50,000 Baht, and the salary raise of 5% 2) The life expectancy is in the parentheses
Defined Benefit
Defined Contribution (GPF)
40
Source: Ministry of Finance
PAYG Pension can cause future fiscal burden
Projection of PAYG Pension Paid by the Government
Government expense for pension was THB132.3b in 2014 or almost 1/3 of government budget of THB345.5b, still increasing going forward
The burden from pension increases the risk in fiscal budget in the future.
Source: Ministry of Finance
41
But…. Encourage the ‘Life Path’ plan for new members
To achieve sufficiency at retirement…
Only 10% Want to Choose and Modify their Own Investment Plan
Only 9.4% Can take loss in some years to earn additional return of 4-6% per year
Sufficiency of Retirement savings study
Only 1.7% Can take >15% loss in any year
Member’s Contributions Mandatory 3% of salary >3% - 12% add-on
42
Encourage more contributions
Others
GPF encourages more savings from members …
Only 3% of total members save more than mandatory of 3%
Members with Additional Saving on the Rise
GPF introduced Life Path plan in 2013 …
Encourage the ‘Life Path’ plan for new members
43
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20... 30... 40... 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Fixed Income
Equity
Others
% A
lloca
tion
44
Return simulation of Life Path plan …
Default Plan Life Path
Lower risk
More likelihood to achieve sufficiency
Encourage the ‘Life Path’ plan for new members
45
Centralized Governing Entity Rules & Regulations
Fund Mobility & Portability
Fund Committee and Public education
To create proper rules & regulations and proper asset allocation
To stimulate financial literacy
Improve investment regulation To reduce overinvestment in low-
return assets
To solve structural problems for semi-government organization
Proper Asset Allocation for long-term sufficiency
More efficiency
Implications from GPF experiences
46
Encourage more savings Encourage and promote Add-on
Contribution
Provide guidance for proper long-term investment return
To ensure adequacy of retirement funds
Implications from GPF experiences
Financial Literacy To better prepared for retirement Understand retirement risk
Facilitate savings and investment culture
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Pension investment:
Challenges in Europe, USA
and Swiss pension funds
Dr. Greg Haenni,
CIO of the pension fund of the state of Geneva (CPEG)
25/05/60 48
• Not enough macro analysis to determine:
1. Investment opportunities and
2. foreseeable market risks
• Importance of portfolio construction
1. Asset allocation and position sizing to optimize the yield of the
portfolio
2. Disciplined investment procedures
3. Elaborate risk reduction/hedging strategies when markets are “quiet”
• Invest with conviction, which is determined by 3 factors:
1. Fundamental analysis
2. Technical analysis
3. Catalyst(s)
• Importance of risk management
1. Assess the diversification of the portfolio
2. Stress tests and sensitivity analysis
3. Liquidity analysis
4. Operational setup (counterparties)
Lessons learnt from the last financial crisis
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Investor behaviors
1. Investors are forced to take more risks (quality, leverage, liquidity, …)
2. Investments are made on a relative basis rather than fundamental reasons
3. Investors’ time horizon is becoming shorter
4. Fee compression across the board
5. The role of fixed income strategies is questioned (low yields, low protection
benefits and interest rate risks)
6. Investors are selling active managers for passive/index solutions
7. ETFs are gaining ground (1/3 of the trading volumes of US equities)
8. Investors are reacting the same way at the same time.
Crowded trades in Europe:
• Real estate
• Infrastructure
• Insurance linked securities (ILS)
• Private lending
• Structure credit
5. Hedge fund strategies are challenged (poor performance and high fees)
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Investor behaviors
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Investment risks
• Difficult to diversify portfolios: correlation between asset classes remain high
• Liquidity: Poor across all asset classes, including equity markets
• Rising Interest Rates: Impact on long-duration bonds/credit.
• Monetary Stimulus Unwind (normalization in Europe)
• Quantitative/big data/high frequency trading could continue to impact
segments of the market
• Is the current equity market rally coming to an end?
Historically, 4 catalysts interrupted an equity bull market:
• A war
• The breakup of a country
• A spiral of rate hikes in the US
• A severe economic recession
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3 possible scenarios: S&P500 index historical graph
Scenario 1 «Paradise»: Sustainable global growth. Scenario 2 «Hell»: Economy goes sideways and this low yield low return environment situation continues for several years
Scenario 3 «Purgatory»: global economic slowdown. Financial crisis
Internet bubble
Subprime crisis
Central bank crisis?
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Post crisis returns of the classic 60/40 stock and bond portfolios
• Returns of 60/40 stock and bond portfolios have been remarkably strong
• We still look for lower expected returns during the next 5 years
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• AUM: USD12Bn
• Global investment strategy
• Base currency: Swiss franc
• The investment strategy is benchmark oriented
• Long-term target return: USD 4.1%
• Since 2016, the investments strategy has been adapted to take advantage
of short-term opportunities (Central Bank put)
• ESG filters are implemented across all asset classes (no direct investments
in commodities)
• The asset allocation is composed of 3 main pillars:
1. 30% of Bonds
2. 30% of equities
3. 30% of Real estate
–
Characteristics of the portfolio of CPEG
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Investment strategy of CPEG
• The basis of the investment strategy is to collect asset class
premiums. Capital appreciation considerations come second.
• The belief is that asset class yields are foreseeable and sustainable
over time
• The investment strategy relies on both the strategic asset allocation
and tactical deviations
• The role of the investment team is to optimize the yield and the
diversification of the portfolio, as well as to implement capital
preservation decisions
• Investment decisions are based on macroeconomic and risk
analysis
• Investment constraint: since 2015, the Swiss National Bank has
implemented negative interest rates (-0.75%), which impacts cash
positions, currency hedges and Swiss bonds positions.
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The drivers of performance
• Recurrent returns (yearly basis):
1. Rents: USD 150mn
2. Dividends: USD 110mn
3. Coupons: USD 50mn
• The 3 pillars deliver an annual yield of +2.7% and should deliver a
+2.2% during a financial crisis (worst case scenario)
• Based on academic studies long term capital appreciation of our
equity portfolio should add +1.2% per annum
• The portfolio should therefore return +3.9% per annum over the next
10 years
– In the long run, most of the returns will come from the
accumulation of asset class premiums
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Allocations based on risk factors
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Conclusion
• Reduce the media noise and stay focused on your goals. Less noise can help you
make better decisions aligned with what really matters
• Assess the sensitivity of the portfolio to macroeconomic factors: to understand the
role each investment plays in the portfolio and stay invested when volatility returns.
Avoid extremes and reduce any over-concentrated investments you may own
• Take the opportunity of “quiet markets” to define/confirm your contingency plan.
This will avoid emotional or panic reactions during markets stress
• Don’t change, but adapt your investment strategy to the current environment
• Don’t neglect your currency hedging policy (currency exposure is the 2nd largest
allocation in portfolios)
• Take advantage of rallies and selloffs to rebalance the asset allocation (Central
Bank free put option)
•
• Focus on high quality assets that you would be happy to own if these is a financial
crisis
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Conclusion
• The Board should be prepared for a period of exceptional
uncertainty and low predictability. It is time to be alert on a wide
range of outcomes and higher volatility
• Diversification and liquidity will be key going forward
• Stay away from crowded strategies and trades
• Focus on investments with an asymmetric payout ratio in your
favor (for example: reduce the impact of negative/low yields)
• Rely on talented/active managers with the ability to deliver
consistent alpha and preserve capital
• Team up with other investors with the same investment philosophy
to co-invest (reduce fees, tailor-made solutions,…)
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– “It is not the strongest of the species that
survives, not the most intelligent that survives.
It is the one that is the most adaptable to
change”, Charles Darwin
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Pension Investment:
Challenges in Asia ex-Japan
Seamus Collins – Executive Director
J.P. Morgan Chase Bank N.A.
25/05/60 62
The Environment for Pension Investment
PRESSURE ON
INVESTMENT PROCESS
Savings policy
Regulation and transparency
Consolidation and
scale drivers
Alternative
Investments
Internalisation of
asset management
Efficiency focus
Longevity and
dependency
Low investment returns
& volatility
Changing social norms
Pressure on
government budgets
GOVERNMENT
PENSION
INVESTMENT
PRESSURES
FUND
RESPONSES
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Managing
Growth & scale
Managing
Alternative
Assets
Internal
Investing
Capabilities
Regulatory
Pressure
Efficiency &
Transparency
Investment challenges of Asia Pension Funds
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Alternative assets – the complex asset challenge
Search for returns driving complex assets
Infrastructure & property
Private Equity
Credit
Legal / administration / valuation
challenges
Bundled investment across asset classes
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Leverage the global asset owner community
Shared solutions and approaches
Insights into investment jurisdictions
Industry advocacy and standards
Knowledge partnerships
Thank you